Daubert Challenges: Doubly Interesting To Accountants

It's been a decade since the case entitled Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), changed the rules by which federal judges determine the admissibility of expert testimony. Daubert and subsequent opinions refining it have established guidelines for ensuring that expert witnesses use credible methodologies for drawing their conclusions. Many state courts have adopted similar rules.

While originally emphasizing issues of scientific testimony, Daubert rules were from the first meant to apply to expert testimony generally, as the examples given below will illustrate. First, however, a word on the economic significance of Daubert to law firm planners.

Quality at a Price

There's no question that Daubert has improved the intellectual integrity of litigation, but this has been accomplished at great cost in both time and dollars.

Preparing one's own expert in a case with “Daubert challenge” potential is now far more elaborate than previously, and challenging an opponent's expert has similarly become more complex. Indeed, Daubert challenges to expert witnesses have become so routine in high-stakes cases that responsible litigators now go to extraordinary lengths to check the professional credentials and prior testimony experience of proposed experts, as well as to check their submissions for possible problems.

An additional opportunity for expense is that various commercial services have arisen to help firms vet their experts and research those of opponents.

Daubert-related work in some types of litigation is now so costly that attorneys should anticipate it in deciding whether to accept a case. Doing so is aided by a good understanding of Daubert, however, and many attorneys hold a wide variety of misconceptions about the subject.

Fortunately, an outstanding resource on Daubert is available free of charge at www.daubertontheweb.com. This unusually lucid, witty and practical Web site has been created and maintained by Philadelphia attorney Peter Nordberg. Nordberg's interest and expertise in Daubert issues stems from his long experience as a litigator for Berger & Montague, PC, notably in toxic-tort class actions. The Daubert Web site, however, is Nordberg's personal project ' the kind of high quality volunteer contribution that makes the Web so worthwhile.

A Taste of Daubert Case Law

I'll leave it to readers to check Nordberg's site for its important theoretical and practical content. To give you a flavor of how Daubert is applied, however, the remainder of this article shares (with permission and without editing) several of Nordberg's appellate case summaries. These particular case notes relate the fate of experts with whom many A&FP readers can easily empathize: accountants.

To view the full set of summaries of these cases, go to www.daubertontheweb.com/accountants.htm. On Nordberg's Web site (and on the A&FP Web site), many of the case titles provide a link to the actual opinion.

Archer Daniels Midland Co. v. Aon Risk Services, Inc., 356 F.3d 850 (8th Cir. 2004). ADM sustains business losses because flooding disrupts its corn supply. It cannot recoup losses via contingent business interruption or extra-expense insurance because its insurance broker failed to secure coverage. At trial of ADM's claims against broker, ADM offers testimony from Dr. Bruce Scherr, damages expert, who says flood caused corn prices to increase by about 25 cents per bushel, causing ADM to incur $113 million in additional expense. Jury finds for ADM. Admissibility affirmed. Broker complains that expert failed to take hedging into account, but testimony was relevant, and district court did not err in finding it sufficiently reliable to go to jury.

Club Car, Inc. v. Club Car (Quebec) Import, Inc., 365 F.3d 775 (11th Cir. 2004). Golf cart distributor sues over termination of distributorship. Defendant counterclaims, offering testimony on lost profits from accountant Peter Ryan. District court excludes testimony. Exclusion affirmed. Accountant based testimony on gross sales and gross profit figures, without taking associated expenses into account. That approach does not square with Georgia law on calculation of lost profits, and does not enjoy general accounting acceptance. No abuse of discretion.

Seahorse Marine Supplies, Inc. v. Puerto Rico Sun Oil Co., 295 F.3d 68 (1st Cir. 2002). Seahorse Marine sues Sun Oil under Petroleum Marketing Practices Act for wrongful termination of Seahorse Marine's franchise. As its damages expert, Seahorse Marine offers Heidie Calero, whose testimony is admitted over Sun Oil's objections. Jury awards damages to Seahorse Marine. Admissibility affirmed. Sun Oil argues that Calero's damage estimate did not properly account for Seahorse Marine's tax obligations, but “inexplicably,” Sun Oil neither pinpoints expert's disputed testimony nor discusses actual figures that would undercut expert's analysis. In fact, Calero did reckon with tax obligations in framing her damage estimates. Sun Oil also argues, more persuasively, that Calero should not have been permitted to offer damage estimate for future lost profits over ten-year period, absent reason to believe franchise relationship would have lasted for so long. But any error in permitting that testimony was harmless, because jury's award fell far short of expert's ten-year estimate.

Bragdon v. Davenport, No. 99-1643 (1st Cir. Apr. 18, 2000) (unpublished). Realty trust purchases investor's shares for relative pittance after misleading investor re their true value. In suit against trustees for securities fraud, common law fraud, and breach of fiduciary duty, investor offers testimony from two experts to estimate value of trust as of date of sale. First, William Currey, real estate appraiser, values all holdings in which trust held interest, in toto. Second, Stephen Grizey, accountant, reduces appraiser's figure to account for fact that trust had only partial interest in some holdings. Jury finds for plaintiff. Admissibility affirmed. Trustees say plaintiffs' method of proof could have caused confusion and created impression that trust was worth more than it actually was. But experts clearly and coherently explained their two-step approach.

Children's Broadcasting Corp. v. Walt Disney Co., 245 F.3d 1008 (8th Cir. 2001). ABC Radio agrees to conduct advertising sales, affiliate development, and consulting for Children's Broadcasting, but exercises its right to terminate after Disney acquires ABC and wants to launch its own children's radio venture. Children's brings claims against Disney and ABC for fraud, breach of contract, breach of fiduciary duties, and misappropriation of trade secrets. Jury awards $20 million to Children's, finding breach of contract by defendants as to advertising sales and confidentiality and misappropriation of trade secrets as to Children's advertiser lists, advertising rates, and programming methods. Trial court awards judgment as matter of law and conditional new trial to defendants for want of sufficient evidence on causation and damages, because testimony from Children's expert Stephen Willis [an accountant? an economist?] should have been excluded and (at least as to damages) tainted jury's findings. As to causation, Willis's testimony: a) was mere speculation; b) lacked any credible supporting analysis; c) was based on no facts; d) afforded no evidence that any particular breach or misappropriation directly caused any specific damage; and e) failed to address other factors that could also have limited Children's profitability. As to damages, Willis's $177 million estimate was based on unreliable financial projections that assumed long-term relationship between ABC and Children's and failed to reckon with impact of Disney's competition. Judgment reversed and cause remanded for new trial on damages (but “exclusion” affirmed). Judgment for defendants as matter of law was unwarranted. As to causation, Willis testified [competently, even though Willis's "theory of causation was questionable"?] that ABC's failure to exercise reasonable efforts in advertising sales led to decline in Children's revenues. Other witnesses also testified to causation, and internal ABC documents likewise supported it. Viewing entire record in light most favorable to Children's, jury could reasonably find causation. As to damages, Willis admitted that adjustment of his $177 million estimate would be necessary if other reasons for decline in Children's revenue were in play. Ample additional evidence was also probative of damages. Jury's award need not precisely match estimates in evidence if award is within parameters established by evidence. As for new trial, as to damages, Willis used uncontroversial accounting methods (discounted cash flow), but failed to take non-wrongful Disney competition into account. Willis also testified that any breach of contract, any use of confidential information, and any misappropriation of trade secrets would have caused exactly the same damages. Children's argues that Daubert sanctions only evaluation of experts' methods, not their conclusions, but Joiner teaches that methods must be linked to conclusions by stronger ties than expert's mere ipse dixit. Willis's conclusions remained unaltered even though several claims had not survived. District court did not abuse discretion in concluding that Willis's testimony should have been excluded. Jury award of $20 million in damages for breach of contract terminable on 90 days' notice suggests jury gave weight to Willis's estimate, and new damage trial is therefore appropriate on theory that his $177 million estimate tainted first trial.

Turck v. Baker Petrolite Corp., No. 00-5082 (10th Cir. May 31, 2001) (unpublished). To prove damages in wrongful retaliatory discharge claim, worker offers testimony from accountant, which district court admits over defendant's objection. Admissibility affirmed. Accountant was qualified because he held bachelor's degree in accounting, had worked as accountant since 1972, and had run his own accounting business since 1983. As for reliability, accountant used salary data supplied by plaintiff to project future lost wages with aid of computer program. District court did not abuse discretion in admitting testimony.

A.A. Profiles, Inc. v. City of Fort Lauderdale, 253 F.3d 576 (11th Cir. 2001). In commercial property owner's action for partial taking, district court admits testimony from city's expert accountant that plaintiff's business would have failed even absent city's taking. Admissibility reversed. Pertinent inquiry, for purposes of proving damages, was not whether plaintiff's business would have succeeded, but rather whether plaintiff's property suffered diminution in value. Accountant's testimony was therefore irrelevant.

Tuf Racing Products, Inc. v. American Suzuki Motor Corp., 223 F.3d 585 (7th Cir. 2000). Plaintiff in franchise termination suit offers CPA to estimate damages. Admissibility affirmed. Defendant complains that CPA held no degree in economics, statistics, mathematics, or any other academic field that would qualify him to perform damage calculations. But idea that Daubert requires some particular form of credentials for expert witnesses is radically unsound. Rules of evidence do not require that experts have particular academic training or opine on questions of “science.” Anyone with relevant expertise may be qualified, and Daubert holds only that if expert testifies on scientific questions, expert's testimony must be based on real science, not junk science. This expert was not doing science; he was doing accounting. Based on financial information furnished by plaintiff and assumptions supplied by counsel, he calculated discounted present value of lost future earnings. Accountants are qualified to do that.

It's been a decade since the case entitled Daubert v. Merrell Dow Pharmaceuticals, Inc. , 509 U.S. 579 (1993), changed the rules by which federal judges determine the admissibility of expert testimony. Daubert and subsequent opinions refining it have established guidelines for ensuring that expert witnesses use credible methodologies for drawing their conclusions. Many state courts have adopted similar rules.

While originally emphasizing issues of scientific testimony, Daubert rules were from the first meant to apply to expert testimony generally, as the examples given below will illustrate. First, however, a word on the economic significance of Daubert to law firm planners.

Quality at a Price

There's no question that Daubert has improved the intellectual integrity of litigation, but this has been accomplished at great cost in both time and dollars.

Preparing one's own expert in a case with “Daubert challenge” potential is now far more elaborate than previously, and challenging an opponent's expert has similarly become more complex. Indeed, Daubert challenges to expert witnesses have become so routine in high-stakes cases that responsible litigators now go to extraordinary lengths to check the professional credentials and prior testimony experience of proposed experts, as well as to check their submissions for possible problems.

An additional opportunity for expense is that various commercial services have arisen to help firms vet their experts and research those of opponents.

Daubert-related work in some types of litigation is now so costly that attorneys should anticipate it in deciding whether to accept a case. Doing so is aided by a good understanding of Daubert, however, and many attorneys hold a wide variety of misconceptions about the subject.

Fortunately, an outstanding resource on Daubert is available free of charge at www.daubertontheweb.com. This unusually lucid, witty and practical Web site has been created and maintained by Philadelphia attorney Peter Nordberg. Nordberg's interest and expertise in Daubert issues stems from his long experience as a litigator for Berger & Montague, PC, notably in toxic-tort class actions. The Daubert Web site, however, is Nordberg's personal project ' the kind of high quality volunteer contribution that makes the Web so worthwhile.

A Taste of Daubert Case Law

I'll leave it to readers to check Nordberg's site for its important theoretical and practical content. To give you a flavor of how Daubert is applied, however, the remainder of this article shares (with permission and without editing) several of Nordberg's appellate case summaries. These particular case notes relate the fate of experts with whom many A&FP readers can easily empathize: accountants.

To view the full set of summaries of these cases, go to www.daubertontheweb.com/accountants.htm. On Nordberg's Web site (and on the A&FP Web site), many of the case titles provide a link to the actual opinion.

Archer Daniels Midland Co. v. Aon Risk Services, Inc. , 356 F.3d 850 (8th Cir. 2004). ADM sustains business losses because flooding disrupts its corn supply. It cannot recoup losses via contingent business interruption or extra-expense insurance because its insurance broker failed to secure coverage. At trial of ADM's claims against broker, ADM offers testimony from Dr. Bruce Scherr, damages expert, who says flood caused corn prices to increase by about 25 cents per bushel, causing ADM to incur $113 million in additional expense. Jury finds for ADM. Admissibility affirmed. Broker complains that expert failed to take hedging into account, but testimony was relevant, and district court did not err in finding it sufficiently reliable to go to jury.

Club Car, Inc. v. Club Car (Quebec) Import, Inc., 365 F.3d 775 (11th Cir. 2004). Golf cart distributor sues over termination of distributorship. Defendant counterclaims, offering testimony on lost profits from accountant Peter Ryan. District court excludes testimony. Exclusion affirmed. Accountant based testimony on gross sales and gross profit figures, without taking associated expenses into account. That approach does not square with Georgia law on calculation of lost profits, and does not enjoy general accounting acceptance. No abuse of discretion.

Seahorse Marine Supplies, Inc. v. Puerto Rico Sun Oil Co. , 295 F.3d 68 (1st Cir. 2002). Seahorse Marine sues Sun Oil under Petroleum Marketing Practices Act for wrongful termination of Seahorse Marine's franchise. As its damages expert, Seahorse Marine offers Heidie Calero, whose testimony is admitted over Sun Oil's objections. Jury awards damages to Seahorse Marine. Admissibility affirmed. Sun Oil argues that Calero's damage estimate did not properly account for Seahorse Marine's tax obligations, but “inexplicably,” Sun Oil neither pinpoints expert's disputed testimony nor discusses actual figures that would undercut expert's analysis. In fact, Calero did reckon with tax obligations in framing her damage estimates. Sun Oil also argues, more persuasively, that Calero should not have been permitted to offer damage estimate for future lost profits over ten-year period, absent reason to believe franchise relationship would have lasted for so long. But any error in permitting that testimony was harmless, because jury's award fell far short of expert's ten-year estimate.

Bragdon v. Davenport, No. 99-1643 (1st Cir. Apr. 18, 2000) (unpublished). Realty trust purchases investor's shares for relative pittance after misleading investor re their true value. In suit against trustees for securities fraud, common law fraud, and breach of fiduciary duty, investor offers testimony from two experts to estimate value of trust as of date of sale. First, William Currey, real estate appraiser, values all holdings in which trust held interest, in toto. Second, Stephen Grizey, accountant, reduces appraiser's figure to account for fact that trust had only partial interest in some holdings. Jury finds for plaintiff. Admissibility affirmed. Trustees say plaintiffs' method of proof could have caused confusion and created impression that trust was worth more than it actually was. But experts clearly and coherently explained their two-step approach.

Children's Broadcasting Corp. v. Walt Disney Co. , 245 F.3d 1008 (8th Cir. 2001). ABC Radio agrees to conduct advertising sales, affiliate development, and consulting for Children's Broadcasting, but exercises its right to terminate after Disney acquires ABC and wants to launch its own children's radio venture. Children's brings claims against Disney and ABC for fraud, breach of contract, breach of fiduciary duties, and misappropriation of trade secrets. Jury awards $20 million to Children's, finding breach of contract by defendants as to advertising sales and confidentiality and misappropriation of trade secrets as to Children's advertiser lists, advertising rates, and programming methods. Trial court awards judgment as matter of law and conditional new trial to defendants for want of sufficient evidence on causation and damages, because testimony from Children's expert Stephen Willis [an accountant? an economist?] should have been excluded and (at least as to damages) tainted jury's findings. As to causation, Willis's testimony: a) was mere speculation; b) lacked any credible supporting analysis; c) was based on no facts; d) afforded no evidence that any particular breach or misappropriation directly caused any specific damage; and e) failed to address other factors that could also have limited Children's profitability. As to damages, Willis's $177 million estimate was based on unreliable financial projections that assumed long-term relationship between ABC and Children's and failed to reckon with impact of Disney's competition. Judgment reversed and cause remanded for new trial on damages (but “exclusion” affirmed). Judgment for defendants as matter of law was unwarranted. As to causation, Willis testified [competently, even though Willis's "theory of causation was questionable"?] that ABC's failure to exercise reasonable efforts in advertising sales led to decline in Children's revenues. Other witnesses also testified to causation, and internal ABC documents likewise supported it. Viewing entire record in light most favorable to Children's, jury could reasonably find causation. As to damages, Willis admitted that adjustment of his $177 million estimate would be necessary if other reasons for decline in Children's revenue were in play. Ample additional evidence was also probative of damages. Jury's award need not precisely match estimates in evidence if award is within parameters established by evidence. As for new trial, as to damages, Willis used uncontroversial accounting methods (discounted cash flow), but failed to take non-wrongful Disney competition into account. Willis also testified that any breach of contract, any use of confidential information, and any misappropriation of trade secrets would have caused exactly the same damages. Children's argues that Daubert sanctions only evaluation of experts' methods, not their conclusions, but Joiner teaches that methods must be linked to conclusions by stronger ties than expert's mere ipse dixit. Willis's conclusions remained unaltered even though several claims had not survived. District court did not abuse discretion in concluding that Willis's testimony should have been excluded. Jury award of $20 million in damages for breach of contract terminable on 90 days' notice suggests jury gave weight to Willis's estimate, and new damage trial is therefore appropriate on theory that his $177 million estimate tainted first trial.

Turck v. Baker Petrolite Corp., No. 00-5082 (10th Cir. May 31, 2001) (unpublished). To prove damages in wrongful retaliatory discharge claim, worker offers testimony from accountant, which district court admits over defendant's objection. Admissibility affirmed. Accountant was qualified because he held bachelor's degree in accounting, had worked as accountant since 1972, and had run his own accounting business since 1983. As for reliability, accountant used salary data supplied by plaintiff to project future lost wages with aid of computer program. District court did not abuse discretion in admitting testimony.

A.A. Profiles, Inc. v. City of Fort Lauderdale , 253 F.3d 576 (11th Cir. 2001). In commercial property owner's action for partial taking, district court admits testimony from city's expert accountant that plaintiff's business would have failed even absent city's taking. Admissibility reversed. Pertinent inquiry, for purposes of proving damages, was not whether plaintiff's business would have succeeded, but rather whether plaintiff's property suffered diminution in value. Accountant's testimony was therefore irrelevant.

Tuf Racing Products, Inc. v. American Suzuki Motor Corp. , 223 F.3d 585 (7th Cir. 2000). Plaintiff in franchise termination suit offers CPA to estimate damages. Admissibility affirmed. Defendant complains that CPA held no degree in economics, statistics, mathematics, or any other academic field that would qualify him to perform damage calculations. But idea that Daubert requires some particular form of credentials for expert witnesses is radically unsound. Rules of evidence do not require that experts have particular academic training or opine on questions of “science.” Anyone with relevant expertise may be qualified, and Daubert holds only that if expert testifies on scientific questions, expert's testimony must be based on real science, not junk science. This expert was not doing science; he was doing accounting. Based on financial information furnished by plaintiff and assumptions supplied by counsel, he calculated discounted present value of lost future earnings. Accountants are qualified to do that.