The Daubert Files

Experts beware!

How far back did you go?

Padre Enterprises, Inc., et al., v. Hugh Gary Rhea d/b/a RMP Crop Insurance

Background

On August 13, 2013, District Judge, Don D. Bush in Federal District Court for the Eastern District of Texas addressed a motion to strike a Defendant’s expert witnesses. The Defendant sought to introduce the expert testimony of two witnesses, one on handwriting and the other on lost profits for commissions and multi-peril premiums over a five year period.

Handwriting Expert

The Court allowed testimony from the handwriting expert to go forward. She was qualified by her training and experience “to present evidence as to Rhea’s signature.” The reliability of her testimony could be tested under cross-examination, but the Court deemed it reliable enough to allow the jury to hear it.

Lost Profits Expert

The Court excluded a CPA’s testimony on lost profits. It found that there was “no basis for the selection of a five-year period for commissions.” The selection of this damage period was “merely speculation and nothing more.”

The Court said that there “was testimony” (whether from the expert or from some other witness is unclear), “that ‘imputed’ premiums only applied to multi-peril losses and not crop losses.” That being the case, the Court found fault with the expert witness for applying “the same commission loss factor to all categories.”

The Court also took issue with the expert for calculating damages on gross profits. “Given that Rhea is seeking lost commissions for his company, even if it is a d/b/a, presumably there are expenses in running a business and some portion would have to be allocated to incurred costs. Therefore, any analysis should be on a loss of net income to the business measured by a reasonable certainty not gross profits.”

“Any loss, however, cannot be based on mere speculation or hypothesis. See Formosa Plastics Corp. USA v. Presidio Engineers & Contractors, Inc., 960 S.W.2d 41, 50 (Tex. 1998).

The Court said that the remaining calculations presented as a part of this expert’s testimony were actually prepared by Rhea’s daughter, and amounted to mere arithmetic. No special expertise was required to present this evidence to the jury. The motion to strike the CPA’s testimony was granted.

Observations/Potential Takeaways

This does not appear to be a significant, precedent-setting decision, and there may be very little to glean from a decision rooted in the obscure details of one particular case. It is worth noting, however, that the Judge found “no basis” for the expert’s selection of a five-year period for his analysis of commissions. Whether there was a basis or not, whether it had been described in testimony or not, the Judge clearly didn’t know what the basis was. That became a significant factor in his decision to exclude the testimony.

It also seems curious that the Defendant’s expert did not properly account for expenses, in the Judge’s opinion. Was the expert offering testimony on a counter-claim against the Plaintiff? If the Defendant’s expert were testifying about damages alleged by the Plaintiff, one would expect him to be looking very carefully at the potential mitigating impact of business expenses.

Table of Citations

Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.

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A Shared Burden and Self-Taught Expert

Wellogix, Inc. v. Accenture, LLP, 716 F.3d 867 (5th Cir. 2013)

Background

Wellogix, Inc. developed software for companies building oil wells. It designed software to aid in the planning and estimation of certain construction costs, known in the oil industry as “complex services.” Accenture was a consulting firm that helped Wellogix develop pilot programs to introduce its software to oil companies. In the course of their collaboration, Wellogix shared source code and other trade secrets with Accenture. Later, Wellogix came to believe that Accenture had used this proprietary information to develop similar products and services of its own, taking business away from Wellogix.

Wellogix filed suit against Accenture. After a nine-day trial in federal court, the jury came to a unanimous verdict in the Plaintiff’s favor, awarding $26.2 million in compensatory damages and $68.2 million in punitive damages. The Court later reduced punitive damages to $18.2 million. This was the amount the Plaintiff sought at trial.

After the trial, the Defendant renewed its pre-trial motion for judgment as a matter of law. It also moved the Court for a new trial. The federal district judge denied both motions. Accenture went to the 5th Circuit Court of Appeals to argue its case on both post-trial motions.

Expert Testimony

In its motion for judgment as a matter of law, Accenture challenged the jury’s finding and the District Court’s judgment on all three prongs of the test for misappropriation of trade secrets under Texas law.

  1. It denied that a trade secret existed.
  2. It denied that the secret was discovered by improper means, or by the breach of a confidential relationship.
  3. It denied that the secret was used without authorization from the Plaintiff.

Then, to give the Court of Appeals one more opportunity to rule in its favor, Accenture also argued that there was not sufficient evidence to support a finding of compensatory damages. The analysis provided by the Plaintiff’s valuation expert was “too speculative,” it said.

The Plaintiff’s valuation expert testified that Wellogix was worth $27.8 million in 2005 – “right about the time that the theft occurred.” This was based on a decision by venture capital groups to invest $8.5 million in Wellogix for a 31% stake in the company. The expert extrapolated a $27.8 million value and deducted the cost of licensing fees, putting the value at $26.2 million. The jury eventually awarded this amount to the Plaintiff.

Accenture said that this analysis was speculative because the venture capital groups made their decision based on speculative projections from Wellogix, and not on “objective data, such as customer contracts.” Wellogix allegedly gave these investors speculative projections showing that the company “would suddenly begin reaping huge profits.” But the Plaintiff’s valuation expert testified about the due diligence of the venture capital groups. They audited Wellogix’s financial statements. They made phone calls to the company’s partners and customers. They asked knowledgeable people what they thought of the software, and tried to find out if there was any competition. Admittedly, due diligence can be done well or it can be done poorly; but, as a part of his testimony, this expert gave a positive assessment of the work these investors performed. He also testified that the target company is typically the source of this kind of information during the due diligence process. “[I]t would be very unusual” if Wellogix did not supply information to the groups because “[t]hat is the source of most of your information when you[ ] come in and [are] asked to value a company.”

On the subject of compensatory damages, Accenture also argued that Wellogix did not establish “the market value of the business immediately before and immediately after” the alleged misappropriation of trade secrets. It may be true that the Plaintiff’s valuation expert did not testify about the Plaintiff’s market value after the misappropriation. The Court opinion points to other testimony providing this significant piece of evidence. The Plaintiff’s software expert testified that “the total value of Wellogix went to zero” after the alleged misappropriation. The Plaintiff’s CEO also testified that, by 2005, the “money was all gone” and Wellogix was “nearly broke.” It was not necessary for the valuation expert to carry the burden alone. Taken as a whole, the testimony of these three witnesses for the Plaintiff gave the jury sufficient evidence to support the verdict on compensatory damages.

When evaluating Accenture’s arguments the justices at the Court of Appeals are not trying to decide whether they themselves are convinced by the testimony and evidence presented to the jury. They are considering whether it would be reasonable for a juror to reach the verdict rendered based on the evidence presented at trial. In this case, the Court found that there was sufficient evidence to support the jury’s verdict. Therefore, the lower Court did not abuse its discretion in denying the post-trial motion for judgment as a matter of law.

Qualified or Highly Qualified

Accenture also petitioned the District Court and the 5th Circuit Court of Appeals for a new trial. One reason given for this request was a set of objections to the Plaintiff’s software expert. In effect, this became a post-trial Daubert challenge.

A general computer sciences background, Accenture said, does not qualify a person to testify about “the oil-and-gas industry, complex-services procurement, or SAP software.” Even if this expert was qualified, his testimony was unreliable because “he did not investigate the facts underlying his opinions.” How did Accenture know this about the expert’s work? They found two “misstated facts” in his testimony. Finally, if he was qualified, and if he did investigate the underlying facts, Accenture argued that he testified about things beyond his expertise. One of those things was the post-tort value of the Plaintiff’s business.

The software expert testified that he had taught himself SAP’s programming language, and implemented SAP software. The Court described this as the “specialized knowledge” required of an expert; and (citing Huss v. Gayden, 571 F. 3d 452 (5th Circuit 2009)) the Court said that Rule 702 (FED.R.EVID.) does not require “that an expert be highly qualified in order to testify about a given issue.” The Court also said that expertise in the oil-and-gas industry or complex services procurement was not necessary to help the jury understand software concepts and terms. This expert was qualified to testify.

Was his testimony reliable? In the context of his broader testimony, the Court said that two misstatements do not constitute manifest error. Misstatements of fact certainly do undermine the credibility of an expert witness, but the Court said that the place to address those issues is on the witness stand, through “vigorous cross-examination” and the “presentation of contrary evidence.”

Did the software expert stay in his sandbox? Did he testify about things within his area of expertise? In regards to his testimony about the value of the Plaintiff’s business, the Court said (fn.6) that his general background in computer sciences qualified him to testify about Wellogix’s software. This, in turn, qualified him to offer an opinion on the general effect of the misappropriation of technology on the value of the Plaintiff’s business – especially given that Wellogix’s value was derived from its technology.

The 5th Circuit Court of Appeals affirmed the decision of the District Court on the motion for a new trial. The lower court did not abuse its discretion by admitting the testimony of the software expert, or by denying the Defendant’s request for a second chance.

According to SCOTUSblog.com this case has been appealed to the Supreme Court, and was distributed on May 20, 2014 for Conference of June 5, 2014. (Update: The petition for a Writ of Certiorari was denied).

Table of Citations

Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.

Closing Shop

Bhatia v. Woodlands North Houston Heart, 396 S.W.3d 658 (Tex. App.—Houston [14th Dist.] 2013)

Background

Dr. Harmohinder Bhatia, a cardiologist, opened his practice as a sole-proprietorship in 1978. Seven years later he hired Dr. Vincent Aquino as an employee. Three years after that he made Dr. Aquino a partner in the practice. Between 1988 and 2003, these two added three other doctors as partners. Drs. Bhatia and Aquino also formed a separate entity to perform nuclear stress testing for their patients. This was called the “Imaging Center.” It was a limited partnership, and as the other three doctors came on board with the practice partnership they also became co-owners and partners in the Imaging Center. Finally, there was also a holding company created to own the equipment these five doctors used.

Sadly, this relationship did not last. Dr. Bhatia and the other four doctors began having business disputes. They agreed to divide their assets and go their separate ways – Dr. Bhatia going alone in the original location, and the other four remaining together in a new place. On February 17, 2003, at an official meeting for the practice partnership (not the Imaging Center or the holding company), the doctors voted unanimously to dissolve “the organization” as of September 1, 2003.

Later a dispute arose over whether the business done in this meeting was effective for all entities, or for the practice only. Dr. Bhatia brought the suit arguing that the Imaging Center was never properly and officially dissolved. By using some of its assets and employees to conduct the same kind of business, the other four doctors were effectively maintaining the Imaging Center as an ongoing concern. He should have received more than his share of the assets in a dead and defunct organization. Instead he should have received the assets due to a withdrawing member of an ongoing and profitable business.

Dr. Aquino and his three colleagues claimed that business for the former entities was customarily handled together as a “unitary bucket.” The meeting on February 17, 2003 may have been called in the name of the practice alone, but the unanimous vote effectively ended all of the entities together.

The case went to trial before a jury in January 2011. Among others who testified at trial, the accountant who oversaw the business windup and distribution of assets said that Dr. Bhatia received cash, equipment, and files related to his patients. An auditor appointed by the Court on Dr. Bhatia’s motion testified that Dr. Bhatia received “at least his fair share of these assets.”

After a trial lasting nearly three weeks, the jury decided that:

  1. The four doctors (Defendants) had not failed to comply with the partnership agreement,
  2. Neither side had misappropriated or converted partnership property,
  3. Each side owed the other a fiduciary duty, and
  4. No one should receive any damage award.

In effect, Dr. Aquino and his three colleagues won. They were awarded attorneys’ fees.

Expert Witness Testimony

At trial, Dr. Bhatia’s valuation expert testified that, “if the Imaging Center continued in operation after September 30, 2003, Bhatia would be entitled to the ‘fair market value’ of his interest in the continuing enterprise.” He set that value at $7.29 million. The valuation expert for the other side argued that, if the Imaging Center did not continue to conduct business but instead dissolved or became defunct, Bhatia would be entitled only to his percentage interest in the value of the partnership’s assets. He set the “fair market value” of those assets at $51,000, an amount smaller than the value Dr. Bhatia had already received in September 2003.

Before the Texas Court of Appeals, Dr. Bhatia argued that the other side’s valuation expert gave unreliable and irrelevant testimony. He said the expert had used an improper method to determine the value of his interest – “book value” instead of “fair market value.” He also took issue with the expert’s “incorrect factual assumption” that the partnership had been dissolved.

The Court admitted that a “book value” methodology would have been inappropriate, but noted that the expert did not use that term to describe his analysis. The court accepted the expert’s explanation when he said, “[Under] what I call the cost or balance sheet approach, [I] look at the assets that we have left on the balance sheet, estimate their value, and subtract the liabilities to get what’s left over.” In the Court’s view, this expert “did not simply look at the asset values listed on the Imaging Center’s books, but undertook to derive a market value for those assets.” The Court overruled Dr. Bhatia’s objection to the expert’s methodology.

The Court took a dim view of Dr. Bhatia’s claim that the demise of the Imaging Center was factually incorrect. On the contrary, “there was evidence supporting the conclusion that the Imaging Center had been dissolved.” The Court recognized the dispute over whether it was dissolved properly or not; but no matter how one might decide that issue, the Imaging Center “was not a continuing enterprise.” Thus, the allegation of an “incorrect factual assumption” had no merit.

Dr. Bhatia’s challenge was overruled on both points, and the admission of this expert witness testimony was affirmed. The trial court did not abuse its discretion in allowing him to testify.

Table of Citations

Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.

Relying on the Other Side’s Projections

To what extent can an expert witness rely on the internal projections of an opposing party? Wouldn’t those numbers, made during the normal course of business and sometimes provided to third parties for financing purposes, reflect the best judgment of management? Would it not be fair to give more credibility to numbers developed for business purposes before the onset of litigation with all of its pressures and incentives? The Texas Court of Appeals for the 14th District in Houston addressed these questions in Citrin Holdings, LLC v. Minnis (14-11-00644-CV, May 9, 2013).

Background

In 2002, when they first met, Jacob Citrin and Matthew Minnis were aspiring real estate investors. The following year they began negotiating a partnership. Together they would form entities to buy industrial properties near airports and seaports, lease the properties, and then sell them. They adapted a company Citrin owned for this purpose. The operating agreement for Cargo Ventures, LLC gave Citrin a 55% interest and made him the manager. Minnis received a 45% interest and became president. The financing for their properties would come from banks, and from an equity investor, Millennium Partners, a company owned by Citrin’s father-in-law.

Under the arrangement between Millennium and Cargo Ventures, Millennium would receive an 8% preferred return on its investment. After recouping the original investment, plus 8% per annum, Millennium and Cargo would share the profits at a ratio of 75% to 25% respectively.

The favorable terms given to Millennium seem to be a principal source of the eventual conflict. Minnis wanted a more equitable sharing of the profits. He wanted Citrin to look for other financing partners. Citrin seemed less inclined to cut Millennium out of the plan. Cargo Ventures did consider other partners, but eventually settled on a renegotiated arrangement with Millennium. Under the modified deal, Millennium received a 12% preferred return and split the profits 50/50. Whether Minnis was ever satisfied with the new arrangement or not, by the end of 2006 the partnership between Minnis and Citrin was over.

Minnis sued Citrin in December 2006. The case came to a jury trial in July 2010 with several causes of action, including fraud, breach of fiduciary duty, negligent misrepresentation, majority oppression, conspiracy, and a request for an accounting, among others. Minnis asked the jury for the value of the carried interests (in the entities/properties) as of March 2007.

Expert Testimony

To prove the value of these interests Minnis sought the expertise and testimony of a CPA, Accredited in Business Valuation (ABV) by the American Institute of Certified Public Accountants (AICPA), a Certified Valuation Analyst (CVA) and member of the National Association of Certified Valuation Analysts (NACVA). He had around 20 years of experience, and an 18-page curriculum vitae.

Citrin challenged the admission of this expert testimony at trial. He did not challenge the expert’s qualifications, the relevance of his testimony, or the reliability of the “direct capitalization” method chosen for his analysis. Citrin argued that the testimony was unreliable because (1) the expert used Cargo Ventures’ internal future projections as if they reflected March 2007 “stabilized values,” and (2) he arbitrarily stopped running the interest on Millennium’s preferred return at March 2007.

Citrin’s Daubert challenge was overruled by the trial court judge, and Minnis won a verdict from the jury in his favor. The trial court awarded him over $28 million in actual damages, the same amount presented by the expert witness in his testimony. He also won over $14 million in exemplary damages, over $10 million in prejudgment interest, and almost $2 million in attorney’s fees.

On appeal Citrin renewed his challenge to the admission of Minnis’ expert witness. Minnis argued that Citrin could not claim, after-the-fact, that the internal projections were an unreliable basis for the expert’s analysis. After all, he said, Cargo relied on these numbers to secure financing from Millennium and other lenders. Citing Del. Open MRI Radiology Assocs., P.A. v. Kessler, 898A.2d 290, 332 (Del. Ch. 2006), the Court agreed with Minnis that “an effort by [Citrin] to discredit or disclaim [his] own Cargo Ventures’ projections would lack credibility, if those projections were otherwise reliable.” However, “[t]hat they are Cargo Ventures’ internal figures is not, standing alone, evidence of reliability. There has been no showing that the stabilized values Cargo Ventures placed on the properties were anything more than its hopes for what the property would be worth in the future. Such hopes do not establish a reliable damages model… Cargo Ventures was entitled to ‘create speculative, optimistic, and conjectural projections and to rely on them in making business decisions.’”

In a footnote (fn.17), the Court of Appeals expressed particular interest in one of the properties, Bronstein, calling it “the most telling example of [the expert’s] reliance on unreliable internal projections.” This property was purchased in January 2007 for approximately $38 million. Applying his methodology to the $113 million “stabilized” value provided by Cargo Ventures’ internal projections, the expert subtracted $30 million in improvement costs and lost rent to reach an adjusted “stabilized” value of $83 million at March 2007. The Court saw an $83 million value in March, compared with a $38 million value in January. What could account for such a significant gap? No one was arguing that there was a flaw in the methodology. It must have been an unreliably optimistic internal projection.

This was not just “the most telling example” of incongruity between internal projections and a real-world value. It was the only positive evidence the Court used to show that the internal projections were “unreliable.” Everything else it said on the matter went to the failure by Minnis to meet his burden to prove that projections were reliable.

The Court in this case certainly believed that “stabilized value” should approximate market value. The Court’s assumption may be correct, but could it be that “stabilized value”[1] is not supposed to resemble what a willing buyer would pay a willing seller in an open and competitive market? At trial it is the job of an expert witness to serve as an educator on questions, like this, related to his field of expertise. On appeal, where experts rarely, if ever, make an appearance before the court, this function may be missed.

The Dissenting Opinion

Justice Sharon McCally wrote the majority opinion in this case. Justice Margaret Garner Mirabel wrote a dissent. She believed that the majority did not strictly adhere to the abuse of discretion standard required for review of a trial court’s evidentiary rulings.

When you properly distinguish between the evidence before the court at the Daubert hearing, and the evidence it had at the time of the verdict, did the trial court abuse its discretion by ruling in favor of Minnis and his expert witness? Justice Mirabel said, no. The issues that ultimately decided this case in Citrin’s favor were not before the court at the time of the Daubert hearing. Therefore, no matter what one may think of the expert’s analysis or the jury’s prudence, the judge did not abuse her discretion by allowing the expert to testify.

Observations/Takeaways

Don’t assume that internal projections from the other side are automatically reliable. While they may be given “great weight… because they usually reflect the best judgment of management, unbiased by litigation incentives,” management also has the freedom to speculate. It could be said that business projections are only as good as the people who make them.

Don’t assume that it is the job of the expert witness alone to carry the argument for the reliability of any projections he uses. There may be other witnesses able to do more to establish the credibility of those documents, based on their familiarity with the people making the projections, the circumstances of their development, and the track record of the organization developing such numbers.

It is always important for an expert witness to consider how his work is going to look when measured against the proverbial “smell test.” Common sense says that a building worth $38 million in January will not be worth $83 million in March, but common sense might be the wrong standard. If so, the “how” and “why” of the distinction between two different measures of value needs to be made very clear on direct-examination in the record of the trial. There won’t be another opportunity to do this at the appellate level.

When reading the Court’s opinion, we cannot see what was written in pre-hearing briefs, and we do not know what was said in oral arguments. We can observe that the majority opinion did not mention the “abuse of discretion” standard until the very end of its recitation of precedents. The dissenting opinion began with that standard, and kept it in view throughout. This is enough to make one wonder whether anything could have been done to persuade the Court to give greater attention to that critical standard. Perhaps not, but it is something to consider before taking this kind of case to an appellate court.

Table of Citations 


[1] “Stabilized” value, as explained by the Court in its opinion, is the value of the property obtained by applying a “capitalization rate” to the “stabilized income” of the property. The “capitalization rate,” or “cap rate,” is a ratio representing the relationship of a property’s net operating income to its value. “Stabilized income” is the income a property is expected to produce at full occupancy.


Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.

A Reliable Brother

Can a plaintiff’s brother testify as an expert witness in her case? Does the mere fact of the relationship establish a bias so significant that it ruins the credibility — the reliability of the testimony? The Texas Court of Appeals, for the Third District, in Austin took up those questions in the 2014 case of Holt v. Kelso.

The case arose out of the disposition of the estate of Helen Schweng. The family situation was complex. Helen had only one child, Donna Schweng, who preceded Helen in death. Donna had only one child, Sondra Kelso, given up for adoption at birth. Sondra survived both mother and grandmother. Sondra made contact with her birth mother, in the early 1990’s, and maintained a relationship with her until Donna’s death in February 1997. Sondra’s grandmother, Helen, died on July 31, 2001.

After her death Helen’s nephews and nieces took possession of the estate, but it wasn’t until July 2005 that they applied with the probate court to administer the estate. Because Donna’s will had named Sondra as her secondary heir (in the event that her boyfriend did not survive her by at least 30 days), “the cousins” (as the appellate court referred to Helen’s nephews and nieces) were probably aware of Sondra and her relationship to Donna and to Helen. But in their application to administer the estate, no mention of Sondra Kelso is made. Instead, they described themselves as “owners of all of [Helen’s] Estate.”

As usual, the probate court appointed an attorney ad litem to represent unknown heirs, and Sondra Kelso was discovered. After some research, it turned out that Sondra’s adoption did not sever her inheritance rights. She was appointed to be the independent administrator of Helen’s estate, and later sued “the cousins” to recover assets they had appropriated to themselves prior to and during their de facto administration of the estate. The trial court found the defendants jointly and severally liable to Sondra for breach of fiduciary duty, conversion, theft, and civil conspiracy, awarding damages of $319,203.88. On appeal, the defendants challenged the sufficiency of the evidence to support the judgment, and argued that the trial court abused its discretion when it admitted expert testimony from Sondra’s brother.

Sondra’s brother (presumably by adoption) is an accountant. The Defendants argued that he was not qualified to testify, because there was no evidence that he had estate accounting experience. They also claimed that his testimony was unreliable due to the natural bias that a brother has for his sister. For good measure, they said that his testimony was irrelevant, but the basis for this claim is not discussed in the Court’s opinion.

The Court of Appeals reviews the admission of expert testimony for “abuse of discretion” on the part of the trial court. The test for abuse of discretion is whether the trial court acted without reference to any guiding rules or principles. Beyond that, the appellate court will not reverse a trial court for an erroneous evidentiary ruling, unless the error probably caused the rendition of an improper judgment.

The Defendants pointed to the fact that a doctor is not automatically qualified by a medical degree to testify as an expert on every medical question. By analogy, they argued that an accountant is not qualified by his credentials to testify as an expert on every accounting question. He needs specialized experience. This argument goes to the weight of the witness’ testimony. The Court looked at the fact that he was an accountant, and that he testified in detail at trial about his education and experience. While the testimony of “an accountant who specialized in probate matters might have been entitled to more weight,” the Court could not find an abuse of discretion in the qualification of the witness.

On the issue of reliability as it relates to bias, the Court dismissed that concern with a single statement. “[I]t was for the trial court to judge the weight to be given his testimony.” Could the witness be biased? Yes. But that goes to the weight of the testimony, and the credibility of a witness is properly addressed by cross-examination and the introduction of contrary evidence and testimony.

As to relevance, the Court noted that Sondra’s brother testified, “concerning a primary dispute in the case—the amount of Helen’s assets… transferred to the defendants—and his analysis was based upon the sworn accountings and documents which were admitted as exhibits at the trial.” The defendants had their opportunity, but did not provide expert testimony at the trial “to contradict his conclusions or dispute the accuracy of the underlying documents.”

The Texas Court of Appeals, Third District, found that there was no abuse of discretion in this case, and further stated that, even if there had been such an abuse, there is no reason to believe that it led to an improper judgment.

 

Takeaway

Can a close personal relationship between an expert witness and a party to the suit raise questions about bias? Yes, it certainly can. Those concerns should be addressed at trial. It is one thing to recognize a cause for concern. It is another thing to show, by cross-examination or contrary evidence, that an expert’s opinions are so bias-driven as to lack credibility and reliability.

Table of Citations

Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.

Michael Baisden vs. I’m Ready Productions, Inc. et al.

Michael Baisden is a radio personality and a novelist. He has written several books, including: The Maintenance Man and Men Cry in the Dark. In 2001 and 2002 Baisden entered into agreements with I’m Ready Productions, Inc. (“IRP”) to develop stage plays based on these two novels. The plays were produced, and were performed before live audiences in 2002, 2003 and 2005. I’m Ready Productions worked with others to make and distribute video recordings of the plays. Co-defendant Image Entertainment, Inc. (“Image”) began to distribute the videos in February 2007.

In June 2007 Baisden entered into an option agreement with Behave Productions, Inc. to develop one or more full-length motion pictures based on two different “Maintenance Man” titles. It appears that at least one of these titles belongs to the same work that was also the subject of the stage play agreement with I’m Ready Productions. When the Defendants discovered the option contract they demanded a $300,000 payment from the Plaintiff in connection with the sale of The Maintenance Man movie rights. Michael Baisden filed his lawsuit in February 2008.

Mr. Baisden sought to introduce the testimony of a Certified Public Accountant, who was expected to testify that actual damages were greater than $13.4 million. This amount included lost film development opportunities for five different Baisden novels. The damages were broken down by title as follows:

  1. The Maintenance Man: $805,000
  2. The Maintenance Man (sequel): $5,334,468
  3. Men Cry in the Dark: $3,580,009
  4. God’s Gift to Women: $2,261,097
  5. How and Why Men Cheat: $1,428,085

The Defendants challenged this expert witness testimony on all three prongs of admissibility: qualifications, reliability, and relevance. He was said to be unqualified as a motion picture industry expert. He was said to be unreliable and irrelevant because he lacked key documents and deposition testimony at the time he formulated his opinions, he used an improper method of assessing actual damages, and he included in the actual damages speculative profits from movies based on books for which no agreement to make a movie ever existed.

Addressing qualifications first, the Court recognized that the CPA was there to opine on damages. He was an expert in valuation of business and commercial ventures, including assessment related to intellectual property infringement. He was not presented as an expert on the motion picture industry. The Court found him to be sufficiently qualified in both experience and training to testify on damages.

With regard to reliability, the Court focused on the speculative nature of lost profits from these movies. Even profits attributable to the first two “Maintenance Man” movies would have been speculative. The existence of an option contract at least established a basis for bringing those two claims into court. But the basis for claiming lost profits on the other three movies was little more than the Plaintiff’s assertion that he wanted to make movies from those books, and that the Defendants’ actions had negatively impacted his ability to do so.

To put an amount on those lost profits the expert had to follow a long string of assumptions. He had to assume that the option would have been exercised on the first two movies, that they would have been successful, that Baisden would have been offered contracts on his other books, and that he would have accepted them. He had to speculate as to the terms of those contracts, the budgets of those movies, the extent of their success, and the percentage of the distributions that would actually reach the Plaintiff’s pockets, as an individual. The Court recognized the work that the CPA had done to base his lost profit opinions on real data for similar movies, but “that slight anchoring of his opinions to reality will not hold them steady against a sea of speculation.”

On the other points attacking the CPA’s reliability the Court decided that they were causes for concern, but did not warrant exclusion. They were fodder for cross-examination, going to the weight of his testimony.

On the issue of relevance the Court said that only testimony related to lost profits on “The Maintenance Man” movie (singular) would be relevant. Although Baisden had an option contract on two Maintenance Man movies, his agreements with the Defendants only covered one work by that title. His pleadings before the Court prior to this proffered testimony had claimed infringement of only one “Maintenance Man” work. Given the lack of basis in the pleadings for claiming damages on two “Maintenance Man” titles, the Court decided that the Plaintiff’s expert could only testify on damages related to one.Of the $13.4 million claimed in lost profits, certainly less than $5.4 million, and perhaps as little as $805,000, survived this Daubert challenge.

Possible Takeaway

Expert witnesses need to read the pleadings, and develop a thorough understanding of the questions before the court. Going beyond the issues currently under consideration in the lawsuit can cause problems for witnesses and those who retain them.

Disclaimer: The views and opinions expressed on The Daubert Files belong to Eric Matthaei, and do not necessarily reflect those of Janik PC.