Plaintiff River Assets, LLC, a company organized under the laws of Illinois, is in the business of operating barges that transport bulk materials. In January 2022, Plaintiff purchased a 33-year-old “spud barge,” model DM-110.
River Assets and the DM 110 were insured under a Hull policy through U.S. Specialty Insurance Company (“USSIC”) through Continental Underwriters Ltd., LLC, with the barge and its equipment having a total scheduled value on that policy of $1,730,000.
On November 9, 2022, a tugboat operated by Defendant Knight Towing, LLC, began a voyage towing four barges, including the subject DM-110 owned by River Assets, across Mobile Bay en route to Orange Beach.
As the tow progressed, the DM-110 began to take on water and eventually on November 14, 2022, the DM-110 sank in shallow water, where it remained until salvage operations refloated the barge on November 23, 2022.
River Assets avers that the sinking was caused by the crew of the tugboat in that they “failed to exercise reasonable care in securing the tow and towing the DM 110 across Mobile Bay in adverse weather conditions.” Both parties hired surveyors who inspected the DM110 in the few months following the salvage operation to determine the extent of the damage and the cause of the incident.
River Assets sought an order excluding cumulative expert testimony on the part of Defendant, US Specialties Insurance Company. Specifically, US Specialties has offered both Kyle Smith and Guy Plaisance as marine surveyors to offer expert opinions in this matter. According to River Assets, both witnesses have similar qualifications, similar opinions and rely on the same information in forming those opinions.
Marine Surveyor Expert Witness
Kyle J. Smith has been a marine surveyor for over twenty years. He also has extensive experience as a licensed mariner. He has conducted hundreds of marine survey inspections and investigations, including preparing many expert reports.
River Assets filed its motion to exclude the testimony and opinions to the extent that they offer opinions that are cumulative of each other but does not state which expert should be excluded. River Assets did not dispute the admissibility of either expert’s report or potential testimony or dispute their qualifications.
Rather, River Assets contended that the experts’ testimony and opinions should be excluded pursuant to Fed. R. Evid. 403 and 702, arguing that “a Court may exclude relevant evidence if its probative value is substantially outweighed by a danger of wasting time or needlessly presenting cumulative evidence.”
Similarly, USSIC argued that the respective experts have distinct qualifications. Specifically, “a review of Captain Plaisance’s CV reflects that, in addition to being a marine surveyor for over twenty years, he also has extensive experience as a licensed mariner.” By contrast, “Kyle Smith, on the other hand, has 38 years of experience in the marine business, but does not have mariner’s credentials.”
In this case, there is significant disagreement over valuation of damages and the causation of the sinking as it relates to the general condition of the DM-110 at the time of the sinking. Accordingly, there is reasonable probability that the testimony of Smith and Plaisance could be not only distinct but aid the factfinder in distinct issues dispositive to this matter. As a result, the Court found that the experts’ opinions regarding the subject vessel are all clearly relevant and connected to the facts concerning the issue of causation and valuation of damages for the sinking of the vessel.
Held
The Court denied Plaintiff’s motion in limine to exclude duplicative expert testimony.
Key Takeaway:
Expert testimony is properly excluded when it is not needed to clarify facts and issues of common understanding which jurors are able to comprehend for themselves. Though it may be true that the expert opinions both implicate the seaworthiness of the vessel, it does not mean that the information is not relevant to other claims, such as valuation and the condition of the DM-110 in and out of the water following the sinking. As a result, there is reasonable probability that the testimony of Smith and Plaisance could be not only distinct but aid the factfinder in distinct issues dispositive to this matter.
Plaintiffs Thomas O’Keefe, Kenneth Cunningham, Joseph Lewis, Brian Judge, Byounghoon Ahn, Dione Heusel, Betsy Riggs, and Thomas West are former executives and employees of Defendant Smoothie King Franchises, Inc.
This action arises out of Defendants’ allegedly wrongful decision to terminate Plaintiffs’ stock options in SK USA, Inc.
Plaintiffs engaged expert Craig J. McCann, Ph.D. and CFA, “to provide an analysis of the value of the Plaintiffs’ options on stock of SK USA.”
However, Defendants filed the motion to exclude McCann’s testimony based on three reasons: (1) McCann failed to adhere to the applicable professional standards in his field; (2) McCann’s stock valuation opinions focus on irrelevant time frames; and (3) there is too great an analytical gap between the facts of this case and McCann’s analysis.
Economics Expert Witness
Craig J. McCann, Ph.D. is Principal, SLCG Economic Consulting, LLC. He has taught graduate investment management at Georgetown University and at the University of Maryland, College Park. McCann is a Chartered Financial Analyst.
McCann received a B.A. and an M.A. in Economics from the University of Western Ontario and a Doctorate degree in Economics from the University of California, at Los Angeles.
In his expert report, McCann summed up his findings with two main points:
Value Based on Stock Sale: He calculated that each of the Plaintiffs’ stock options was worth about $3,164 using a standard valuation method (called the OPM backsolve) based on SK USA Holdings’ recent sale of preferred stock.
Real Value is Higher: He argued that this number is too low because the company’s main shareholder deliberately chose to raise $100–$130 million in a way that avoided selling stock, which suggests the stock was more valuable than the sale price implied. Based on this, McCann concluded that the plaintiffs’ stock options were actually worth between $3,337 and $3,619 each.
He also presented a table showing how the options’ value would change if the company’s total value was between $700 million and $800 million (as supported by private equity offers and executive testimony). In that case, he said the options would be worth $3,246 to $3,743 each — again, more than the $3,164 calculated using the first method.
Motion to Exclude
Defendants argued that the Court should exclude McCann’s testimony because he admitted that he did not adhere to the Uniform Standards of Professional Appraisers, the International Valuation Standards, the American Society of Appraisers’ standards, the National Association of Certified Valuators and Analysts’ standards, or the Association of International Certified Professional Accountants’ (“AICPA”) standards in forming his opinions.
Defendants further argued that McCann violated industry standard by not using multiple methods to calculate the value of Plaintiffs’ stock options.
Additionally, Defendants argued for exclusion of McCann’s testimony based on the dates he valued the Plaintiffs’ stock options. According to Defendants, the relevant date for the valuation of Plaintiffs’ stock options is the date the alleged breach of contract occurred.
Finally, Defendants sought to exclude McCann’s testimony, arguing that there is too great an analytical gap between the facts he considered and the opinions he reached.
Analysis
However, the Court found McCann’s opinions to be relevant and reliable and found that his testimony will aid the jury in resolving the factual dispute as to the value of the Plaintiffs’ stock options. The Court was convinced that McCann’s reasoning is scientifically valid.
Basically, the criticisms raised by the Defendants all are related to the bases and sources for McCann’s opinions.
Held
The Court denied Defendants’ motion to exclude the testimony of Craig McCann.
Key Takeaway:
As a general rule, questions relating to the bases and sources of an expert’s opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the [factfinder’s] consideration. Furthermore, experts may rely on one version of disputed facts in forming their opinions. Any weaknesses in his testimony based on questionable assumptions may be dealt with on cross-examination.
Basically, the Court is convinced that the Defendants will effectively cross-examine McCann as to the bases and sources of his valuation opinions and will highlight any weaknesses in his testimony for the benefit of the jury.
Case Details:
Case Caption:
O’Keefe Et Al V. Smoothie King Franchises, Inc. Et Al
Plaintiff Jason Greene purchased a recreational vehicle (“RV”) from Defendant Thor Motor Coach, Inc. (“Thor”). The purchase included a 12 month / 15,000 mile limited warranty (the “Limited Warranty”). After purchasing the RV, Greene encountered issues with the RV that led him to seek repairs on several occasions. Some issues remained even after the attempted repairs. Greene thus sued Thor for violation of the Magnuson Moss Warranty Act (“MMWA”), breach of express warranty, breach of implied warranty, violation of the Indiana Deceptive Consumer Sales Act (“IDCSA”) and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law.
Thor seeks to exclude the proposed valuation opinions of Greene’s proffered expert, Mr. Dennis Bailey, arguing that Bailey’s opinion is unreliable.
Recreational Vehicle Expert Witness
Dennis Bailey had a self-owned recreational vehicle business. He has been directly involved in the daily decisions of retail sales (trade in values-new and used manufacturer purchases) wholesale sales (buying and selling), customer service (determination of warrantable defect for submission to the manufacturer-solutions for repair and actual repair), retail and wholesale parts (determination parts pricing-decisions on what specific inventory to purchase and how much). Bailey has attended technical schools such as Norcold, Dometic, Lippert leveling and slide out certified and is RVIA certified.
Bailey has experience in appraisals since 1980’s. Other areas of designated certification are Certified Infrared Thermographer through Flir and LP certified gas. Bailey is an experienced appraiser specializing in recreational vehicles. He has conducted over 1,000 specialized RV appraisals and estimates. He is an independent Investigator.
Thor concedes that Bailey’s experience “likely endows Bailey with sufficient technical knowledge to render opinions about the presence of defects in a motorhome like the RV” but argues that Bailey’s valuation opinion is inadmissible because it is mere ipse dixit and fails to meet the reliability standards required under Fed. R. Evid. 702 and Daubert.
Greene purchased the RV for $249,901.59. In Bailey’s report, he opines that, after considering the purported defects, the fair market value of the RV at the time it was purchased was $100,000.00.
Bailey’s report details his findings related to purported defects in Greene’s RV. Bailey lists 24 variables that can affect an RV’s value. His report also refers to the National Automobile Dealer Association (“NADA”) guidebook, which he describes as the “generally accepted industry standard for guideline value only. It is not the Bible of the true value as it strictly [sic] a guide only.”
Thor argues that, when Bailey was deposed and had to elaborate on those 24 variables and describe his methodology, Bailey’s conclusions ultimately rest on Bailey’s “say-so” and amounts to inadmissible ipse dixit. The Court agrees with Thor that, at times Bailey’s testimony suggests that his conclusions are speculative.
Market Supply and Demand
However, at Bailey’s deposition, he does provide some additional explanation for his proffered opinions. He testified that several of the 24 variables did not factor into his valuation determination because they were not relevant. As mentioned, one variable Bailey did consider was market supply and demand. When questioned how he evaluated that variable, he testified that he’s been in the business for over “45 years” that he has “seen units” and “used to work at one of the biggest dealerships and we had those. I know about them units. I know about the RVs and which ones sell and which ones don’t.”
Insurability Risk
Another variable Bailey considered was insurability risk. Bailey testified that he did not consult any insurance companies in reaching his determination, but that in his experience he has “dealt with insurance companies. I have dealt with them when I did work for the dealers and stuff selling trailers. I know that they won’t insure a lot of these people if they find out that they have damage to them.”
Economic Cost
When discussing the economic cost—another valuation factor—Bailey testified that he considered the cost to fuel the RV given the present cost of $6 a gallon for gas and $7 a gallon for diesel, and the cost for bringing the RV back and forth to the dealership to get it fixed.
Prohibited Use on Highways
When discussing another factor—prohibited use on highways—Bailey elaborated that it is his opinion that the RV’s alleged defects to the electrical system make it dangerous to take on the highways.
Such a conclusion does not strike the Court as mere ipse dixit, particularly because Thor does not challenge the admissibility of Bailey’s opinions on the existence of the alleged defects. Bailey also testified that he considered whether the RV could be financed based on his experience selling units and trying to get customers financing. While Bailey was unable to provide itemized deductions for the factors he considered, this Court has held that itemized deductions are not required.
In conclusion, Greene’s evidence suggests that Bailey’s testimony is the product of reliable principles and methods, and his opinion reflects a reliable application of the principles and methods to the fact of the case under Rule 702.
Held
The Court denied Thor’s motion to exclude the valuation opinion of Greene’s expert witness, Dennis Bailey.
Key Takeaway:
The experienced appraiser’s opinion is sufficient if the opinion consists of an explanation of the methodologies and principles referenced, and the conclusions are not solely based on subjective opinion or speculation, as appraisals are not an exact science that can be mechanically scrutinized.
Plaintiff Multiple Energy Technologies, LLC (“MET”) accused Under Armour of false advertising in relation to certain products that contain bioceramic powder. MET contended that Under Armour inaccurately claimed that the Federal Food and Drug Administration had determined that those products enhanced recovery.
Under Armour sells activewear and sleepwear products directly to consumers. This includes the sale of products containing a competing bioceramic product known as Celliant, which is manufactured by Hologenix, LLC (“Hologenix”). Under Armour advertises these products separately from their other product offers and as helping to promote recovery, especially for athletes.
Plaintiff MET brought four claims against Defendant Under Armour, Inc.: violation of the Lanham Act, violation of the Sherman Act, misappropriation of trade secrets; breach of non-disclosure agreement; tortious interference with contract; tortious interference with prospective business expectancies; unjust enrichment; unfair competition; conversion; a claim for an accounting; and a claim for injunctive relief.
Under Armour retained Jerome Schmitt to rebut MET’s damages expert, Peter Wrobel. MET filed a motion to exclude the expert testimony of Under Armour’s accounting expert witness, Jerome Schmitt.
Accounting Expert Witness
Jerome B. Schmitt is a Certified Public Accountant (CPA) and is accredited in business valuation, certified in financial forensics, and a Certified Fraud Examiner.
He has extensive experience in calculating damages—including claims for monetary relief in trademark infringement, false advertising, and other Lanham Act cases—and in the valuation of intellectual property, including trademarks and trade names.
Schmitt earned his Bachelor of Science in Business Administration in Accountancy from John Carroll University in 2000. He followed this with a Master of Business Administration degree from the same institution in 2002.
Schmitt concluded that any disgorgement of Under Armour’s profits from the sale of Recover products would not exceed $151,162. This was based on several assumptions and methods, including the following:
He assumed that the appropriate time frame for the disgorgement analysis spanned from July 1, 2017, to December 31, 2020.
He applied the “full absorption” method and determined that certain costs qualified as appropriate deductions for purposes of calculating the profits subject to disgorgement.
He assumed factors beyond the alleged advertising, such as contributions from Under Armour’s brand value and advertising of the Recover products beyond the alleged false statements, should be taken into account in calculating profits subject to disgorgement.
He used the relief from royalty method to discount damages due to Under Armour’s brand value.
MET argued that Schmitt’s opinions:
I. addressed topics beyond his qualifications.
II. used unreliable methodology for calculating damages.
III. presented a serious risk of confusing the jury and were unfairly prejudicial.
The Court addressed each of these arguments.
I. Schmitt has not opined on topics beyond his expertise
MET claimed that Schmitt offered opinions that he was unqualified to give, regarding:
(1) the appropriate time frame for measuring damages arising out of false advertising;
(2) the value of Under Armour’s brand and how that value reduced the amount of profit realized from false advertising;
(3) the impact of Under Armour’s advertisements beyond the alleged false statements; and
(4) reasons as to why Under Armour would or wouldn’t enter into a contract with MET.
Time frame for measuring damages
Based on evidence in the record and for the purpose of his analysis, Schmitt assumed that a potential disgorgement of Under Armour’s profits would be limited to sales of Recover products from July 1, 2017, to December 31, 2020.
The Court found this assumption regarding the appropriate time frame perfectly acceptable. The Court observed that MET confused Schmitt’s assumption for calculating Under Armour’s profits attributable to false advertising as an opinion about marketing and advertising.
It was held that his assumption about the appropriate time frame for measuring damages relied on evidence in the record. Specifically, it was based on responses to interrogatories indicating that Under Armour’s advertisements referencing the FDA had ended by March 2020. Additionally, the Court found that MET did not identify any specific instances of alleged false advertising after 2020. Therefore, the Court was held that the assumption was permissible.
Brand valuation
Schmitt opined that Under Armour’s brand contributed to Under Armour’s ability to make sales of Recover products. He applied the relief from royalty method to reduce Under Armour’s profits from the sale of Recover product by the value of the Under Armour brand.
MET argued that Schmitt was not qualified to opine on Under Armour’s brand value or the impact that it had impact on profits. However, the Court disagreed.
Given his qualifications as a CPA with extensive experience in calculating damages and the valuation of intellectual property, the Court found that Schmitt was qualified to opine on brand valuation and on how Under Armour’s brand and intellectual property contributed to the profit on sales of Recover products.
Impact of Under Armour’s advertisements beyond the alleged false statements
Schmitt opined that Under Armour’s advertisements for Recover products “contain additional language and concepts that are not alleged to be false advertising.” These included references to “fast recovery, the use of bioceramic powder, and the product’s functionality.” He stated that, assuming a finding of liability, it was appropriate to account for the contribution of such language relative to the alleged false advertising.
Analysis
To begin with, the Court found that Schmitt was qualified to opine on factors that could appropriately be considered as part of the disgorgement analysis. The Court found that, contrary to MET’s argument, Schmitt did not opine on the impact that the advertising at issue had on sales of particular products, particularly because he did not purport to calculate the amount of profits attributable to the effect of advertising that is not alleged to be false.
When MET argued that Schmitt’s testimony on causation was inappropriate, the Court found that Schmitt stated in his report and deposition testimony that his analysis was based on “an assumption that there will be a finding of liability.” Schmitt further explained that, while the damages expert is not necessarily opining as to the liability of the alleged act, the damages expert cannot simply calculate damages that are untethered to the act.
In conclusion, the Court found that Schmitt’s damages opinion “did not attempt to define the law applicable to the case.” Instead, the conclusions he drew in his report, such as the propriety of accounting for the effect of “positive” advertising when assessing profits for disgorgement, were based on his apportionment analysis under the Lanham Act.
Schmitt merely opined that the disgorgement calculation could be further reduced by the profits that are not attributable to the alleged false advertising. To sum up, this fell into the category of “facts leading to a legal analysis,” not a “legal conclusion.”
Analysis of Wrobel’s “reasonable royalty” calculation
MET argued that Schmitt inappropriately opined on “reasons as to why Under Armour would or would not enter into a contract with MET.” However, the Court interpreted Schmitt’s report differently. Schmitt instead opined that Wrobel’s “reasonable royalty” calculation was speculative because of his assumption that, but for the alleged misconduct, Under Armour would have entered into an agreement with MET instead of Hologenix.
Schmitt disputed this assumption by citing the record. He noted “a number of factors that influenced [Under Armour’s] decision to switch from” MET to Hologenix, “that are independent of the alleged false advertising or other alleged wrongful conduct.”
The Court found that, in rebutting Wrobel’s expert report, Schmitt made permissible assumptions. In other words, these assumptions were “reasonably based on the evidence in the record.” It added that any weaknesses in the facts and assumptions underlying Schmitt’s opinion could be explored on cross-examination.
II. Schmitt may use the full absorption method to calculate costs, but the Court will hold in abeyance its decision on the relief from royalty method
A. Full absorption method
To determine the profits available for disgorgement, Schmitt applied the full absorption method. This method “deducts costs that assist in the production, distribution, or sale of the products at issue, irrespective of whether or not such costs are considered fixed or variable.” After reviewing Under Armour’s financial reports and having a discussion with an Under Armour employee, he concluded that certain costs included in Under Armour’s selling, general, and administrative expenses contributed to the sales of the Recover products at issue. He then deducted these costs from the revenue on Recover products.
MET argued that Schmitt’s use of the full absorption method was inappropriate because Under Armour would have incurred much of those fixed costs without selling the infringing product which is why the method failed to show that the costs and profits excluded from the disgorgement analysis were not attributable to the infringing product.
The Court decided not to exclude Schmitt’s testimony applying the full absorption method. Generally, in trademark infringement cases, courts have used two methods for apportioning costs:
a) The incremental approach “under which only direct costs of production are deducted.”
b) the full absorption approach “under which overhead costs are apportioned to production of the infringing item.”
According to the Court, MET was correct that, for a disgorgement analysis under the Lanham Act, the infringer “bears the burden of proving all elements of cost or deduction” and “has the burden to isolate the profits which are attributable to” the infringement.
However, MET’s criticisms of Schmitt’s application of the full absorption method concerned the weight of his testimony, not its admissibility. The Court held that these criticisms should be addressed through cross-examination of Schmitt, a crucial part of which would be his decision to use the full absorption method.
B. Relief from royalty method
To value the contribution of Under Armour’s intellectual property to the sale of its products, Schmitt used the relief from royalty method. Under this method, he applied a “market-based royalty for the subject intellectual property at issue as a reasonable proxy for the profit or value it contributes to the sale of products that use the intellectual property.”
Basically, to establish what the applicable royalty rate would be for the Under Armour brand, he looked at one instance in which Under Armour licensed its name and logo to an apparel distributor, through which Under Armour received a 14% royalty of the net revenue of apparel sold with its name or logo. He then reduced Under Armour’s profits from the sale of Recover products by 14%, to reflect the royalty that Under Armour “was relieved from paying by virtue of owning its brand.”
MET argued that Schmitt’s use of the relief from royalty method was improper because a hypothetical royalty amount isn’t a proper deduction when evaluating Lanham Act damages.
While Under Armour argued that “courts accept the apportionment of profits for contributions made by a Defendant in generating those profits,” it had not sufficiently established that the relief from royalty method had been subjected to peer review or that it is a generally accepted method for calculating proper costs or deductions in the Lanham Act context.
While the novelty of Schmitt’s methodology was “not a per se reason for exclusion,” the Court lacked a basis to decide whether his methodology was sufficiently reliable. Therefore, the Court declined to rule on whether Schmitt’s testimony applying the relief from royalty method should be excluded. The Court intended to hold an in limine hearing, with Schmitt in appearance-as to the relief from royalty methodology and its reliability.
III. The Court won’t exclude Schmitt’s report and testimony under Rule 403
MET argued that based on the purported deficiencies, Schmitt’s testimony presented a serious risk of confusing the jury and prejudicing MET as per Rule 403.
Balancing the probative value against the prejudice, the Court found that the probative value of Schmitt’s expert opinions was high. In other words, it was held that there was no danger of unfair prejudice. If any confusion or potential prejudice arose, the Court declared that it was open to curative jury instructions to assist the jury.
Held
The Court held that it would leave open the issue of whether Schmitt’s application of relief from royalty methodology is admissible under Rule 702. However, it denied MET’s motion to exclude expert Jerome Schmitt’s report and testimony in all other respects.
Key Takeaways:
The Court denied MET’s motion to exclude Jerome Schmitt’s testimony in all other respects for three main reasons:
Qualification and Expertise: The Court found that Schmitt did not exceed the scope of his expertise. His opinions regarding the timeframes, brand valuation, and advertising impact were all within his qualifications given his extensive experience in damages calculation and intellectual property valuation. The Court noted that Schmitt based his assumptions on evidence in the record and didn’t make impermissible legal conclusions.
Methodology: The Court accepted Schmitt’s use of the “full absorption” method to determine the profits available for disgorgement. The Court viewed MET’s criticism of the method as a challenge to its weight, not its admissibility. It determined that cross-examination could address these issues.
Rule 403 Balancing: The Court determined that Schmitt’s testimony had high probative value that outweighed any potential prejudice. Therefore, any risk of jury confusion could be addressed through curative jury instructions.
Please refer to the blogs previously published about this case:
Plaintiff Old Gate Partners, LLC (“Old Gate”) alleged that Paddock is liable for contamination of a property (“the Property”) currently owned by Old Gate. Paddock retained Michael P. Hedden to provide valuation opinions of the Property’s “highest and best use and market value.”
As a part of his analysis, he utilized an appraisal technique known as the sales comparison approach. Based on this approach, Hedden concluded that the Property’s market value was not less than $9 million as of May 2017 and not less than $10.37 million as of April 2023.
Old Gate sought to exclude Hedden’s testimony on the grounds the he is unqualified
On November 29, 2023, Old Gate filed its first motion to preclude Hedden’s testimony. Old Gate sought to exclude Hedden’s testimony on the grounds the he is unqualified, that certain of his proffered opinions are irrelevant, and that his analysis is unreliable.
The Court granted the motion in part and denied it in part. Specifically, the Court rejected challenges to Hedden’s qualifications, and it excluded as irrelevant his opinions about Milford’s zoning intentions and entrepreneurial profit.
The Court also excluded as unreliable Hedden’s valuation opinions of the Property. The Court concluded that his sales comparison analysis relied on “unclear, unsupported rationales”, and that Hedden failed to disclose “underlying data sufficient to replicate his analysis”.
Hedden’s report provided “no discernable methodology” sufficient for the Court to understand how Hedden determined adjusted sale prices
Further, the Court also found that Hedden had categorized certain adjustment factors using qualitative descriptors like “superior” or “inferior”, without ascribing quantitative dollar amounts or percentage adjustments. As a result, the Court reasoned, Hedden’s report provided “no discernable methodology” sufficient for the Court to understand how Hedden determined adjusted sale prices, and, ultimately, his 2017 and 2023 valuations.
However, because Hedden could potentially clarify his methodology, the Court granted the Motion as to the valuation opinions without prejudice to Hedden filing an amended report that corrects the shortcomings identified by the Court.
On June 19, 2024, Paddock filed an expert report supplement from Hedden. On August 13, 2024, Old Gate filed its second motion to exclude Hedden’s testimony.
Old Gate argued that the supplement is insufficient to correct the infirmities identified by the Court in its prior Ruling, and that Hedden’s 2017 and 2023 valuation opinions should remain excluded.
Real Estate Appraisal Expert Witness
Michael P. Hedden has over 43 years of real estate appraisal, valuation and consulting experience. Hedden is a Managing Director and, in this role, specializes in providing valuation, litigation support, and expert testimony services as a knowledgeable real estate professional in all aspects of market analysis and valuation of real property. Michael has experience in the appraisal of industrial, commercial, residential, and special purpose property including hospitality, hospital, and healthcare facilities.
In its prior Ruling, the Court provided leave for Hedden to file an amended report that explained, “with reasonable clarity and precision, the methodology that he used when he made his adjustments.” In his expert report supplement, Hedden included updated sales adjustment grids for his 2017 and 2023 valuations. Under the heading of “Cumulative Adjusted Price,” these grids replace the prior “Superior” and “Inferior” designations of the original report with percentage value adjustments. It appears to the Court that these percentage value adjustments are only at intervals of 5 percent, either 5 percent, 10 percent, 15 percent, or a dash, indicating no adjustment. In his narrative explanations for how he arrived at these intervals, Hedden largely relied on “his experience and professional judgment.”
The Plaintiff has raised concerns about this disclosed methodology. The Court shares these concerns about whether Hedden’s selected numerical adjustments are “based on sufficient facts or data,” or whether these adjustments are subjective, speculative, or arbitrary.
In the Court’s view, this raises serious concerns about whether Hedden’s experience and professional judgment can fill the gap between qualitative observations and quantitative adjustments to property valuations.
However, because the parties are scheduled for a bench trial, the Court “has considerable discretion in admitting the proffered testimony.”
The Court chooses to exercise that discretion here and will admit Hedden’s valuation opinions. In the Court’s view, Hedden’s supplemental report is sufficient to render his methodology discernable and understandable to the Court.
Held
The Court denied the Plaintiff’s second motion to preclude the testimony of Michael P. Hedden.
Key Takeaway:
Rather than delaying the case through a detailed scrutiny of Hedden’s property comparison adjustments, the Court will reserve judgment and decide “after the evidence is presented whether it deserves to be credited by meeting the requirements of Daubert and its progeny.”
Old Gate is free to vigorously cross examine Hedden on the reliability of his valuations. Additionally, Old Gate may raise arguments at a later stage that Hedden’s testimony should be disregarded by the trier of fact because it fails to meet the threshold for admissibility under Daubert.
Case Details:
Case Caption:
Old Gate Partners, Llc V. Paddock Enterprises, LLC
Docket Number:
3:18cv1657
Court:
United States District Court for the District of Connecticut
Plaintiff Max Zach Corporation entered into a contract with Defendant Marker 17 Marine (“Marker 17”) to modify Plaintiff’s vessel, a 2006 48′ Fountain Express Cruiser (the “Boat”)by retrofitting and repowering it with four Mercury Outboard 400 Racing Motors, at a cost of about $315,000. The agreement also provided for the delivery of the Boat by Marker 17 to Plaintiff in Greenwich, Connecticut.
The Boat was modified to specification by Marker 17, packaged, and loaded for transport from Wilmington, North Carolina to Greenwich, Connecticut. Marker 17 selected Defendant Premium Carriers Inc. (“Premium Carriers”) to assist with loading the Boat onto a trailer and to transport the Boat via land transport. The Boat was damaged when, in New Jersey, Premium Carriers accidentally flipped the trailer carrying the Boat en route to Plaintiff. Thereafter, Superior Towing and Transport, LLC towed the Boat from the accident site to its storage facility in New Jersey, where the Boat is still stored at a rate of $150 per day.
In the Second Amended Complaint, the Plaintiff raised four causes of action:
Plaintiff disclosed Scott Mitchell as his valuation expert witness whose testimony Defendants moved to preclude, arguing that Mitchell is unqualified to opine on the valuation of the Boat and that his testimony is unreliable and inadmissible.
Valuation Expert Witness
Scott Mitchell is the owner and sales manager of Boardwalk Marina in Stratford, Connecticut. He has decades of experience as a certified boat dealer, which includes dealing in Fountain powerboats from 2004-2010.
Mitchell, the owner and sales manager of Boardwalk Marina in Stratford, Connecticut, offered an opinion on the Boat’s valuation and the market value if sold as new today. The Defendants claimed that he did not employ the level of intellectual rigor necessary to opine as to the valuation of the boat.
In response, the Plaintiff cited Mitchell’s decades of experience as a certified boat dealer.
However, Mitchell’s expert report makes no reference to any experience as a marine surveyor or appraiser; instead, Mitchell states in the addendum to his expert report that his “qualifications derive from buying, repairing, building, and selling new and used boats since his entire adult life.” Further, at both his deposition and the hearing, Mitchell testified that he is not certified to do valuations, he does not belong to the American Society of Appraisers or any other association of appraisers, and he is not a licensed appraiser in any state.
While Mitchell, as a dealer and reseller of boats, may be qualified to be an expert in boat sales and resale values, his qualifications and experience as a marine appraiser are not demonstrated. The Court cannot conclude that his knowledge of boat valuations is sufficient such that his opinion would likely assist the trier in fact in arriving at the truth and, accordingly, finds that Mitchell is not qualified to be an expert as to the valuation of the Boat.
B. Reliability of Mitchell’s Testimony
Defendants argued that Mitchell’s testimony was unreliable for two reasons:
(1) it did not follow any recognized methodology, including Uniform Standards of Professional Appraisal Practice (“USPAP”), and
(2) it was speculative, contradictory, and assumptive.
Mitchell’s opinion is unreliable because the Court cannot discern the exact methodology Mitchell used to valuate the Boat. Mitchell concludes in his report that the value of the Boat is $640,000, which is the sum of the $315,000 cost to “re-power” the Boat and the Boat’s $325,000 value based on 2021 prices. Nowhere in the report does Mitchell explain how he arrived at the $325,000 value of the Boat or what were the “2021 prices” on which he relied; rather, he simply states, without more, that the included exhibits of other boats “can be used to triangulate on value but moreover, support his conclusion of using the cost basis rather than market comps.”
i. Mitchell’s testimony is also contradictory and misleading
The Court’s confusion regarding Mitchell’s methodology is exacerbated by Mitchell’s contradictory and misleading testimony. As noted, Mitchell’s report suggests that he relied on the “cost basis” method only, and not on comparable sales, to valuate the Boat. However, at his deposition in June 2024, Mitchell testified that he used a “blend of comparables and cost basis” based on “[p]revious boat sales, current boat sales, current boat valuations, and then on the cost basis, what the guy paid to have the boat redone[.]”
Mitchell again changed his explanation of the comparable sales and how he valued the Boat at the September 2014 hearing on the instant motion, further supporting the Court’s conclusion that his expert opinion is unreliable. Mitchell affirmed that to ascertain the $325,000 number in his valuation, he used a comparable “sale” of a 2006 48-foot Fountain listed for $388,944, and that the two other boats mentioned in the report were not comparables.
He thereafter conceded that none of these references or calculations were in his expert report or produced to Defendants. Moreover, because Mitchell testified at his deposition that the only records he used to calculate the $325,000 value were from the Boat Trader website, the Court held that Mitchell’s opinion is unreliable for being assumptive, contradictory, and, most importantly, rooted in inadequate methodology. Daubert and Federal Rule of Evidence 702 thus mandate the preclusion of Mitchell’s report and testimony.
C. Relevance of Mitchell’s Testimony
Since the Court held that Mitchell is not qualified to serve as an expert and his testimony is unreliable, the Court declined to address whether his testimony met the relevance standard under Federal Rule of Evidence 401.
Held
Therefore, the Court granted the Defendant’s motion to exclude Plaintiff’s valuation expert witness Scott Mitchell’s testimony
Key Takeaways:
The Court excluded Scott Mitchell’s expert testimony regarding the valuation of the Plaintiff’s boat due to two primary reasons:
Lack of Qualifications: While Mitchell, as a dealer and reseller of boats, may be qualified to be an expert in boat sales and resale values, his qualifications and experience as a marine appraiser are not demonstrated. The Court cannot conclude that his knowledge of boat valuations is sufficient such that his opinion would likely assist the trier in fact in arriving at the truth and, accordingly, finds that Mitchell is not qualified to be an expert as to the valuation of the Boat.
Unreliable Methodology: In addition to the fact that Mitchell did not see or examine the Boat, or any comparable boats, prior to rendering his opinion as to the Boat’s valuation and that his report contains no comments or criticisms of Defendants’ vastly different appraisal that was prepared a month earlier, there is no indication from Mitchell’s expert report or deposition testimony that his “testimony is the product of reliable principles and methods” or that he “reliably applied the principles and methods to the facts of the case.”
Case Details
Case caption:
Max Zach Corporation V. Marker 17 Marine Et Al
Docket Number:
3:23cv1088
Court:
United States District Court for the District of Connecticut
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
Plaintiff John Doe, who was referred to by a pseudonym by the Court, brought an action against the Trustees of Dartmouth College (“Dartmouth”) alleging that Dartmouth had violated Title IX of the Education Amendments of 1972 and had breached a contract by expelling him from Dartmouth’s Geisel School of Medicine. This expulsion followed Dartmouth’s determination that he had sexually assaulted another medical student. Doe had been a fourth-year medical student at Geisel, and Dartmouth had subjected him to an internal disciplinary proceeding in response to allegations made by his former roommate, Sam Smith. Smith had alleged that Doe had performed oral sex on him without his consent. Following this proceeding, Dartmouth concluded that Doe had indeed sexually assaulted Smith, leading to Doe’s expulsion from Geisel. Subsequently, Doe initiated this legal action seeking injunctive and monetary relief. He contended that Dartmouth’s disciplinary procedure had failed to adhere to the requirements of Title IX, as well as Dartmouth’s own policies, constituting a breach of contract.
The Court had considered Dartmouth’s motion to exclude Doe’s expert, Cyndi J. Livermore, on matters related to lost wages and lost earning capacity, as per Federal Rule of Evidence 702, Daubert v. Merrell Dow Pharmaceuticals, Inc, and its progeny.
Livermore’s report had analyzed the lost wages and lost earning capacity incurred by Doe due to his expulsion, considering two potential career paths: internal medicine and cardiology. Her ultimate determination was that Doe had already suffered damages amounting to at least $429,000 (in the case of pursuing internal medicine) and up to $784,000 (if he had pursued cardiology). She also concluded that Doe’s future lost earnings would have ranged from $1.52 million (as a practitioner of internal medicine) to $3.97 million (as a cardiologist). In arriving at these figures, Livermore had considered several factors, including: (1) an estimation of Doe’s remaining work life; (2) Doe’s anticipated life expectancy; (3) the probability of employment in each career path; and (4) Doe’s projected earnings for each career path had he not been expelled. To determine his projected earnings but-for his expulsion, Livermore had factored in: (a) Doe’s earnings prior to his expulsion from Dartmouth; (b) the probability, expectancy, and reasonability of future earnings; and (c) future growth. Additionally, Livermore had taken into account Doe’s post-expulsion income and projections of actual or mitigated earnings.
Business Valuation Expert Witness
Cyndi Livermore is a Vice President at Management Planning Inc. She has performed hundreds of business valuations ranging from pre-revenue start-up to $1B revenue pre-IPO companies, and across many industries, including: Agribusiness, Automotive, Banking, Construction, Family Offices, Precision Machinery, Real Estate Holding. Cyndi J. Livermore successfully earned her Bachelor of Science degree in Business Administration from DeVry University, followed by the attainment of her Master of Business Administration (M.B.A.) from the Southern Methodist University – Cox School of Business. Livermore was the director of ComStock Advisors, a provider of professional services in the area of business valuation, litigation support services, and management consulting prior to joining Management Planning Inc.
Discussions by the Court
Dartmouth had initially argued that Livermore lacked the necessary expertise to testify as an expert regarding Doe’s lost wages and lost earning capacity. Dartmouth contended that her specialization in business valuation rendered her unqualified to provide opinions on these matters, especially in the context of a medical student’s interrupted education. Additionally, Dartmouth emphasized that Livermore had never testified as an expert in cases involving medical students or doctors’ lost wages or earning capacity. However, the Court found Dartmouth’s argument unconvincing. Livermore, an economist with more than a decade of experience in financial analysis, held both a bachelor’s and a master’s degree in business administration. At the time of preparing her report, she served as the director of ComStock Advisors, a firm specializing in business valuation, litigation support, and management consulting. While Livermore acknowledged her primary focus on business valuation, she testified that she possessed substantial experience in conducting financial valuations of primary care physicians and cardiologists. Furthermore, she had previous experience in performing lost wages and lost earning capacity analyses. The fact that Livermore had not previously undertaken such an analysis for someone in Doe’s precise situation did not render her unqualified considering an expert need not be a preeminent practitioner in the relevant field to possess sufficient knowledge.
Dartmouth had contended that Livermore’s expert opinion regarding Doe’s lost future earnings wouldn’t be beneficial to the jury in determining a fact in issue, as Doe was seeking equitable relief in the form of reinstatement at Geisel, making Livermore’s opinion on lost earning capacity immaterial. Dartmouth argued that if Doe succeeded at trial, he would return to Geisel and regain his ability to earn a doctor’s income, and if he failed, he would have no basis for recovering damages related to lost earning capacity. However, the Court disagreed with Dartmouth’s argument. Doe had brought claims against Dartmouth based on contract and Title IX, seeking both injunctive relief in the form of reinstatement and monetary damages. Typically, Courts do not order equitable relief in Title IX or contract-related cases when monetary damages would suffice to compensate the Plaintiff. As highlighted in Doe’s objection, the Court had the discretion to decide not to grant the injunctive relief sought even if he prevailed on one or more of his claims. Consequently, evidence concerning Doe’s lost earning capacity would indeed assist the jury in comprehending the evidence and determining a relevant fact in the case.
Dartmouth had argued that Livermore’s expert opinion lacked a reliable methodology because, during her deposition, she had acknowledged that a comprehensive damages analysis should include a “skills analysis” (examining the range of jobs suited to an individual’s transferable skills and talents) as well as a “labor market analysis” (evaluating the available job opportunities and earning potential for individuals with Doe’s skills). Additionally, Dartmouth raised concerns about Livermore’s failure to consider the potential for bonuses, stock options, or promotions in Doe’s current job.
Upon reviewing Livermore’s report, the Court concluded that her methodology was indeed reliable in forming her conclusions. In her assessment of Doe’s lost wages and earning capacity, Livermore began by considering factors such as Doe’s remaining life expectancy and the portion of that life expectancy during which he would be expected to work. She also factored in Doe’s probability of employment, which encompassed his present employment, the likelihood of him completing his medical degree if his expulsion were reversed, the chances of degree completion if his expulsion were not reversed, and the probability of Doe securing a residency if he completed his degree. Moreover, Livermore took into account projections of Doe’s future earnings in specific medical professions based on published data. She further applied a discount to calculate the present value of future earnings and estimated annual inflation-based raises.
The Court agreed with Doe, emphasizing that Dartmouth’s objections pertained more to the factual inputs used in Livermore’s analysis rather than the reliability of her methodology. Dartmouth’s contentions, particularly those related to alternative job opportunities for Doe and the potential for promotions, stock options, or bonuses in his current position, were deemed suitable for cross-examination rather than grounds for excluding Livermore’s testimony.
Dartmouth had argued that Livermore’s opinions regarding Doe’s lost wages and lost earning capacity as a cardiologist were not aligned with the facts of the case and should not be presented to the jury. The Court concurred with Dartmouth on this matter. Doe’s complaint explicitly indicated his intention to pursue a career as a primary care physician, with no mention of considering a career in cardiology. Additionally, during his deposition, Doe confirmed his plan to become a primary care physician upon completing his medical degree.
Under New Hampshire law, which applied to Doe’s breach of contract claims, damages cannot be awarded for “speculative losses”, as was held in Miami Subs Corp. v. Murray Family Trust & Kenneth Dash Partnership. The remedies available in private Title IX actions paralleled those found in traditional contract claims. Rather than compensating for speculative losses, contract damages were designed to restore the prevailing party to the position they would have been in had the contract been performed. In this case, Doe’s expressed intent was to pursue a career as a primary care physician if allowed to complete his medical degree. Consequently, Livermore’s opinions concerning Doe’s lost wages and earning capacity as a cardiologist were deemed irrelevant, not assisting the jury in determining a fact in issue, and not grounded in the factual circumstances of the case.
Held
Dartmouth’s motion to exclude Cyndi Livermore’s testimony was granted in part and denied in part. Specifically, it was granted to the extent that it sought to exclude testimony related to Doe’s lost wages and lost earning capacity as a cardiologist. However, the motion was otherwise denied.
The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.
Key Takeaways
This case demonstrates how Courts serve as gatekeepers regarding expert witness testimony under Daubert and Rule 702. When expert testimony is challenged, the Court must assess the witness’s qualifications, the relevance of their testimony, and the reliability of their methodology. Here, the Court found the Plaintiff’s expert was qualified to testify about lost earnings despite lacking direct experience with similar cases on account of her significant experience conducting financial valuations in the exact same industry.
However, the Court agreed part of the expert’s testimony regarding speculative lost earnings as a cardiologist was irrelevant. This demonstrates that experts cannot testify about damages that are too speculative based on the facts of the case. Experts must tailor their testimony to the circumstances at hand. The Court also assessed the reliability of the expert’s methodology under Daubert’s flexible test. The Court found her methodology reliable amidst objections about the factual inputs she used. This shows that mere disagreement about an expert’s assumptions is fodder for cross-examination rather than exclusion.
This copyright infringement case was brought by JBrick, LLC (“JBrick”) against Chazak Kinder, Inc., Chazak Distribution, Inc., Marav USA LLC, and Yaacov Schwartz (collectively “Defendants”) in the United States District Court for the Eastern District of New York. JBrick alleged that the Defendants infringed on their copyright for a lego model of the Second Holy Temple by creating and selling a similar product.
JBrick was established in 2014 by Yitzchok and Channie Kasowitz with the goal of creating Jewish-themed custom lego sets, one of which was an accurately scaled lego model of the Second Holy Temple. In November 2018, Kasowitz displayed JBrick’s completed Second Holy Temple model at a convention where he met Defendant Schwartz. Shortly thereafter, Defendants began selling a model that JBrick alleged was nearly identical to their copyrighted Second Holy Temple model.
In May 2021, JBrick filed a complaint against the Defendants for copyright infringement. On April 25, 2022, Plaintiff filed its second amended complaint. On August 19, 2022, the parties completed expert discovery. JBrick hired a damages expert, Michael D. Pakter, to calculate the actual damages suffered by JBrick and any profits earned by the Defendants that were attributable to the alleged infringement. The Defendants retained their own rebuttal expert on damages, Trevor McClain-Duer. Plaintiff moved to exclude certain of McClain-Duer’s opinions and testimony in response.
After discovery concluded, the Defendants filed a motion to strike the expert opinions of Pakter. Specifically, Defendants had raised several objections to Pakter’s opinions. These objections included his assertion that Plaintiff would have sold an equal number of the copyrighted set as Defendants sold of the accused product, his claim that damages should encompass the Temple Mount Product and the unsold inventory of the Temple Mount Product, his evaluation of Defendants’ profits from the allegedly infringing product, and his suggestion that “JBrick can recover both its lost profits and a disgorgement of Defendants’ profits.” During that time, Plaintiff had maintained that Pakter’s opinions were grounded in “complex but transparent calculations” designed to help the jury comprehend the financial aspects underpinning the damages asserted in the case.
Accounting Expert Witnesses
Michael D. Pakter is a certified public accountant, registered and licensed in the State of Illinois, with over 40 years of experience in accounting and forensic accounting. He holds a Bachelor of Commerce and a Bachelor of Accountancy from Witwatersrand University, in South Africa. The American Institute of Certified Public Accountants has recognized him as “Certified in Financial Forensics” and as a “Chartered Global Management Accountant.” He has earned several other certifications including as a “Certified Valuation Analyst” and “Master Analyst in Financial Forensics” from the National Association of Certified Valuators and Analysts, and as a “Certified Insolvency and Restructuring Advisor” from the Association of Insolvency and Restructuring Advisors. Michael Pakter has over 20 years of experience in determining economic damages and performing business valuations. He is currently the Managing Member of Gould & Pakter Associates, LLC (“G&P”). He was retained on account of his extensive accounting experience to opine about the Plaintiff’s damages assuming Defendants’ liability.
Trevor McClain-Duer is a certified public accountant, registered and licensed in the State of Illinois. He holds a Bachelor of Business Administration from the University of Notre Dame and a Master’s Degree in Accounting from Ohio State University. He is a Chartered Financial Analyst with over 15 years of experience in valuation and determining economic damages. He is currently the Director of Valuation at Caliber Advisors, Inc., an expert valuation and economic consulting firm.
Discussions by the Court
The Court first examined Pakter’s qualifications and found he had significant accounting and damages calculation experience to serve as an expert on economic damages. Turning to the reliability of Pakter’s opinions, the Court addressed four disputed aspects of his testimony.
First, it denied striking Pakter’s opinion that JBrick would have sold an equivalent number of temple models as Defendants, despite the price difference between the products. Pakter had suggested that, assuming the Defendants’ liability, one possible method for calculating actual damages was to consider “JBrick’s lost profits for its Holy Temple product.” This calculation involved assuming that Plaintiff would have made all or various fractions of the infringing sales that Defendants had made. However, the Defendants had raised objections to this calculation, deeming it speculative. They pointed out a significant disparity in the sale price between the two products, with Plaintiff’s Second Holy Temple Product priced at $613 compared to the Defendants’ allegedly infringing product priced at $60.
Nonetheless, it was argued that nothing indicated that Pakter’s conclusion, which suggested that Plaintiff would have sold an equal number of its Second Holy Temple Product as Defendants, was so unrealistic or contradictory as to imply bad faith on his part.
Second, Plaintiff contended that its Second Holy Temple Product and a second product known as the “Temple Mount Product” were “directly related.” Consequently, they argued that Pakter could factor in the lost sales of the Temple Mount Product when calculating Plaintiff’s damages. The Temple Mount Product was designed to complement and enhance the educational value of the Second Holy Temple Product. Court determined that while such a damages theory was not inconceivable, the Plaintiff had failed to provide credible evidence of a clear relationship between the sales of the two products absent evidence of lost customers or canceled orders for the Temple Mount Product as a direct result of the alleged infringement.
Third, Defendants argued that Pakter’s calculation of their profits was not reliable. They pointed out that his use of a “per unit cost” figure and his failure to account for the total loss of 300 products donated by Defendants to charity were issues of concern. In response, the Plaintiff had maintained that Pakter’s methodology was indeed reliable. According to the Plaintiff, the core of the dispute between the parties revolved around whether profits and costs should be calculated on a per-unit bought-and-sold basis or based on all products manufactured at one time and the decisions made by the Defendants regarding the disposition of those products. Court held that the Defendants showed no authority proving Pakter’s approach was unreliable. At most, the parties disagreed on the appropriate profit analysis, weighing on Pakter’s credibility rather than admissibility. The Court ruled the jury should resolve this battle of the experts.
Fourth, Defendants argued that Pakter had inappropriately opined that the Plaintiff should be entitled to profits from Chazak’s downstream distributors. Furthermore, the Defendants had contended that Pakter’s opinion was based on the premise that the Plaintiff could not only recover for Chazak’s alleged infringement but also claim downstream profits resulting from the same alleged infringement of a single product.
However, the Court had determined that in cases where two or more individuals were involved in or contributed to a single infringement, they were all jointly and severally liable. In such instances, within a single infringement action, only a single set of statutory damages could be considered. This was because the Copyright Act allowed for only a single recovery for a single sale, and the Court’s decision addressed the issue of multiple parties and liability in the context of copyright infringement.
Plaintiff had sought the exclusion of specific opinions and testimony from McClain-Duer. Their basis for this exclusion request rested on the assertion that McClain-Duer lacked the qualifications to provide expert opinions on three key aspects: (i) the size of the market for JBrick’s Second Holy Temple Product; (ii) “price-point comparisons” related to the Second Holy Temple Product; and (iii) JBrick’s manufacturing capabilities.
In response to this request, the Defendants had argued that McClain-Duer was functioning as a rebuttal expert. His role was primarily focused on identifying deficiencies in Pakter’s report, specifically highlighting the Plaintiff’s failure to establish, using competent evidence, the size of the market for the Second Holy Temple Product and the manufacturing capabilities of JBrick. This dispute had centered on the qualifications and role of McClain-Duer in the case.
The Court found McClain-Duer qualified as an expert on economic damages but lacking in foundation to opine on the size of the market for JBrick’s product or its manufacturing capabilities. McClain-Duer was capable of identifying deficiencies in Pakter’s report. However, he was not qualified to go further and provide an opinion based on research indicating that lego branded sets from popular movies and TV shows sold for significantly less, indicating an insufficiently large market for the Temple product. Similarly, while McClain-Duer could point out that Pakter’s calculations assumed that the Plaintiff could have produced and sold over 15 times the number of sets he actually sold during the same time period, he lacked the qualifications to opine that the Plaintiff did not have the product manufacturing capabilities or capacity to manage such a significant increase in sales. This was because McClain-Duer did not possess the necessary expertise in the field more closely aligned with this opinion, which would be industrial engineering.
Therefore, the Court struck McClain-Duer’s testimony regarding the potential market for JBrick’s temple model, comparisons to other lego prices, and JBrick’s ability to meet higher production levels. It found these opinions exceeded McClain-Duer’s economic damages expertise and amounted to advocacy without qualification.
Court excluded the portions of Duer-McClain’s report and testimony purporting to describe the size of the market for JBrick’s Second Holy Temple Product, “price-point comparisons” related to the Second Holy Temple Product, and JBrick’s manufacturing capabilities.
Held
The Court granted in part and denied in part the Defendants’ motion to strike the opinions of Michael Pakter, and granted the Plaintiff’s motion to strike certain opinions and testimony of Trevor McClain-Duer. 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 the importance of scrutinizing the scope and reliability of expert witness testimony through Daubert motions. The Court served a gatekeeping role to restrict expert opinions to only what the witness was qualified to offer and exclude speculative or unsupported theories.
For Pakter, most of his damages calculations passed muster as grounded in reasonable methodology for the jury to assess. However, his assumption of losses on a non-infringed product went too far without evidence of causation. This highlights how courts will strike expansive expert opinions that lack factual support in the record.
Meanwhile, for McClain-Duer, his opinions on the size of the market for the Second Holy Temple Product and manufacturing capability of the Plaintiff required demonstration of expertise in the field more closely aligned to such opinions. This shows how rebuttal experts cannot provide opinions that go beyond the scope of their own expertise.
In summary, this case reinforces the principles that expert testimony must stay within the witness’s area of specialized knowledge and have a reliable factual basis.
This case involved a dispute between Ste. Michelle Wine Estates, LLC (Plaintiff) and Tri County Wholesale Distributors, Inc. (Defendant) over the value of brands that Defendant had previously distributed for Plaintiff. The parties had a distribution agreement that was governed by the Ohio Alcoholic Beverages Franchise Act. This Act allowed a manufacturer like Plaintiff to terminate a distribution agreement upon a “change in control” over the manufacturer, but required the manufacturer to compensate the distributor for the diminished value from the loss of brands.
A change in control occurred with Plaintiff, and Plaintiff terminated the agreement with Defendant on December 28, 2021. The parties attempted to negotiate the diminished value but were unsuccessful. Plaintiff then filed this lawsuit seeking a judicial determination of the diminished value. The Court entered an interim order requiring Plaintiff to pay Defendant $112,500 based on Plaintiff’s last good faith offer. That Order is subject to a final determination by Court, which will be made following a bench trial.
Both parties retained experts to assess the diminished value. Plaintiff moved to exclude the report and testimony of Defendant’s business valuation expert witness, Edward “Ted” B. Wardell, while Defendant in turn moved to exclude certain opinions of Plaintiff’s business valuation expert witness, Justin L. Cherfoli. The Court denied both motions.
Business Valuation Expert Witnesses
Justin Cherfoli is a Managing Director in the valuation disputes practice and serves as the national practice leader for the firm’s Valuation Disputes/Family Law group. He has extensive experience as an expert witness and consultant in various financial matters, including business valuation, economic damages, and forensic accounting. His work has covered a wide range of purposes, including marital dissolutions, shareholder disputes, commercial litigation, estate and gift taxation, financing, purchase and sale advisement, intellectual property valuations, reasonable compensation, and other tax, corporate, and litigation-related matters. Additionally, he serves as a court-appointed or mutually agreed-upon financial expert in shareholder disputes and divorce matters. Prior to his current role at Stout Risius Ross, a leading global advisory firm, Justin worked with Ernst & Young, LLP, in its Assurance and Advisory Business Services Group in Detroit.
Ted Wardell is a Certified Valuation Analyst (CVA), awarded by the National Association of Certified Valuation Analysts (NACVA). Wardell also brings 27 years of beverage industry experience to Ippolito Christon as the former owner operator of Point Pleasant Distributors, a 2.6mm case SABMiller/HUSA/Diageo distributor on the coast of central New Jersey. Through operating Point Pleasant Distributors, Wardell gained experience with business planning, improving operations, increasing cash flow and ROI, integrating merged distributors, and ultimately selling a distributorship. He has specific expertise in the financial and operational aspects of running a beverage distribution company. Wardell complemented his industry experience with formal education, including an Executive MBA in Finance from Rutgers University and a BA in Economics from the University of Pennsylvania.
Discussions by the Court
The Court first discussed Plaintiff’s motion to exclude the expert report and testimony of Ted Wardell. Plaintiff argued that Wardell’s valuation improperly included 2022 profits, violating Sixth Circuit precedent that a distributor cannot retain profits for a year if the valuation also includes lost profits for that same year. Wardell’s December 2021 valuation did not account for profits Defendant earned in 2022 from distributing Plaintiff’s brands after termination was announced. Plaintiff argued the Court could not simply deduct the 2022 profits, as the deduction would need to be adjusted to present value.
Defendant countered that excluding 2022 profits was a legal issue, not a valuation issue, so it was not Wardell’s role to decide. Defendant argued that if the Court determined 2022 profits should be excluded, the Court could readily perform that calculation. Plaintiff asserted Wardell should not be permitted to alter his valuation methodology at this late stage of the litigation.
Regarding Wardell’s inclusion of 2022 profits in his 2021 valuation, the Court found wholesale exclusion was not required. The Court was aware of the Sixth Circuit precedent barring inclusion of post-termination profits when valuation included projected lost profits as was established in Tri County Wholesale Distributors, Inc. v. Labatt USA Operating Co. Moreover, the Court found these issues went to the weight, not admissibility, of Wardell’s opinions, especially in a bench trial. The Court could properly weigh Wardell’s opinions with full knowledge of the relevant case law. If the Court found Wardell’s opinions inconsistent with the law, it could assign little or no weight.
Plaintiff argued that Wardell ignored the Sixth Circuit precedent which required using the average industry capital structure in the valuation, citing the Tri County case. Defendant countered that Tri County is not controlling and had no collateral estoppel effect as it was based on specific facts and did not mandate using the industry average capital structure.
The Court agreed with Defendant’s position on this issue. The Court found that Tri County did not require using the average industry capital structure, since that case involved the beer industry and made a fact-specific determination of capital structure. The Sixth Circuit simply held that the district court did not “clearly err” in how it determined capital structure in that particular case. The Court rejected any argument of collateral estoppel that would bind Defendant to use the industry average capital structure based on Tri County.
Excluding Defendant’s expert entirely for not using the industry average capital structure would essentially decide the case in Plaintiff’s favor. The Court found this drastic outcome is not warranted under Tri County. Ultimately, the capital structure issue represents a battle of the experts that the Court as trier of fact is equipped to resolve at trial. The Court declined to impose an industry average requirement based on Tri County, finding Defendant is not bound to use that capital structure method.
The Court then discussed Plaintiff’s argument that Wardell just adopted marginal cost data from Defendant’s counsel. Marginal costs represent the “avoided costs” that a distributor would not incur without distributing certain brands. The lower the avoided costs, the higher the diminished value. Plaintiff argued Wardell should be precluded from testifying because he relied on marginal cost data provided by Defendant’s counsel rather than verifying the data himself. Wardell acknowledged the cost information from counsel seemed higher than expected. Plaintiff asserted an expert cannot simply offer counsel’s opinion as his own, so Wardell’s testimony should be excluded. Defendant noted that by relying on the data it provided, Wardell used higher avoided costs, resulting in a lower diminished value valuation that benefits plaintiff.
The Court again found wholesale exclusion was not required, as diminished value involved several calculations. Even if the Court found Wardell’s report unreliable on avoided costs, it need not reject the whole report. The Court would be better positioned at trial to assess the reliability of the avoided costs analysis.
Plaintiff argued that Wardell failed to comply with Rule 26(a)(2)(B) since a list of all of the cases in which he testified in the prior four years was not provided to the Court, nor was the compensation he was being paid for this case articulated. Defendant held it to be a moot point considering the relevant information regarding Wardell had been disclosed to the Plaintiff since then. The Court held that exclusion was not warranted on that basis.
As for the Defendant’s motion to exclude certain opinions of the Justin Cherfoli, Defendant contended that Cherfoli’s analysis relied on what they described as “made up” data when assessing avoided costs and asserted that Cherfoli improperly incorporated fixed costs into his calculations. In response, Plaintiff stated that the data provided by the Defendant was insufficient and incomplete for conducting a proper evaluation of avoided costs. Plaintiff argued that Cherfoli’s expert opinion was grounded in his extensive experience.
The Court first addressed the argument that Cherfoli relied on “made up” avoided costs data. The Court again found it could properly assess the reliability of the data at trial, so exclusion was not required. The Court also found it could determine if Cherfoli improperly included fixed costs, and reject that testimony after trial if needed. The Court observed that Defendant’s arguments went to weight rather than admissibility.
Held
In conclusion, the Court denied both motions to exclude expert testimony, finding the most of the issues identified went to the weight of the testimony rather than admissibility. With a bench trial, the Court was confident it could properly evaluate the expert opinions. The Court’s stance on the bench trial remains to be seen.
Key takeaways:
The key takeaways with respect to expert witness testimony were:
The Court found most of the challenged aspects of the expert reports and testimony went to the weight of the evidence rather than admissibility. The Court was confident it could properly weigh the expert opinions at trial.
Issues like reliance on potentially unreliable data, failure to comply with disclosure requirements, and methodological deficiencies were found to impact weight rather than require outright exclusion in the instant case.
The Court was unwilling to exclude expert testimony entirely based on isolated deficiencies in the analysis. Only if the core of the expert’s opinion was deemed unreliable would exclusion be warranted.
The Court deferred some of the key challenges to expert methodology until trial, finding the context of the trial testimony would allow the Court to better evaluate reliability.
In summary, the Court emphasized its role as the trier of fact in a bench trial and expressed confidence in its ability to properly weigh even questionable expert opinions based on the trial evidence. Daubert was deemed to be less of a concern when the trial judge was the trier of fact.
