A Financial Expert's View on e-Discovery and Financial Expert Challenges

Editor's note: In this edition, we offer the second of a two-part article on the challenge of financial experts as witnesses in cases in which e-discovery is relevant. In Part 1, which appeared in the February edition of e-Discovery Law & Strategy, our expert author from PricewaterhouseCoopers provided an overview of how a financial expert can help counsel in e-discovery and litigation strategy. In this month's article, Michael LoGiudice examines instances of financial experts being challenged and excluded from cases ' and how to avoid exclusion. We reprint the first two sections of February's article for background and continuity. Click here to see the February article.

The well-known Daubert case was decided in 1993. Kumho Tire was decided in 1999. Challenges to financial experts under the rules outlined by Daubert and Kumho Tire are increasing.

In December, amendments to the Federal Rules of Civil Procedure ('FRCP') affecting e-discovery went into effect. These rules are likely to give rise to challenges for a variety of reasons. The challenges, for instance, may result from discovery requests being perceived as allegedly overly burdensome or irrelevant.

Because the rules went into effect just three months ago, there's not much data on challenges, successes and failures; on the other hand, there's enough data on challenges citing Kumho Tire and Daubert for PricewaterhouseCoopers ('PwC') to have done a study and drawn some conclusions.

Financial-expert reports and e-discovery requests are closely intertwined. The financial expert's report may depend on a company's financial information. That financial information will be more easily analyzed if it's obtained electronically. That means, then, that financial experts may be helpful in mounting or defending against challenges to e-discovery requests.

Expert Report v. e-Discovery Request

There's no reason why an attorney shouldn't understand his or her financial expert's report, but it may be a different story when it comes to understanding the underlying data needs required to complete the investigation, data-gathering or other due diligence required to form the financial expert's opinion.

A financial expert's role is to take situations that may not be easy for a layperson to understand and make them understandable. That's the principal reason why, at a minimum, the attorney hiring the financial expert should be able to understand the financial expert's report. And it's also why the financial expert's documentation needs may not be so easy to understand.

The complex situation that needs to be made understandable to the lawyer, court and, possibly to the jury, is represented in the underlying data. The issues in the case, along with the financial expert's training and experience, will dictate what's needed to quantify the impact of the actions in question. Although it's reasonable to expect the lawyer to understand the financial expert's report, it would be unreasonable to expect a lawyer without an accounting, finance or commercial background to understand what documents are needed to form an opinion, and what documents a company usually retains in electronic or hardcopy form. It would also be unreasonable to expect a lawyer without an accounting, finance or commercial background to understand how the underlying data can be used to create a model to simulate the business behavior 'but for' the actions in question. It is reasonable, though, to expect a lawyer, judge and jury to understand, where applicable, the model and report that the expert creates from that underlying data.

The financial expert's report will be presented to the court or a jury. In either case, one cannot expect that the report will be used by sophisticated financial professionals. That's why the financial expert is hired: to make the financial information easy for the court or jury to understand. If the lawyer hiring the financial expert cannot understand his or her own expert's report, then how can that lawyer expect the court or jury to understand it?

Expert Witness Challenges

'Daubert Challenges to Financial Expert Witnesses in Federal and
State Courts 2000 – 2005, June 20, 2006,' by Aron Levko, ASA, CMC, CPIM, Laurence Ranallo, CPA, and Aijun Besio, Ph.D., is the ('PwC') study based on a search of published opinions in federal and state courts, not reflecting bench rulings on motions, or other unpublished cases. This recent PwC study shows that once challenged, experts are wholly or partially excluded nearly 50% of the time (see, Figure 1, below). When narrowed to the financial-expert challenges in the study ' which involved 410 subjects ' the nearly 50% exclusion rate still held true. The total scope included 2,249 expert challenges from 1,708 cases citing Kumho Tire.

[IMGCAP(1)]

Lack of reliability was the most frequent reason why financial experts were excluded. Lack of relevance and improper qualifications were the second and third reasons, respectively. By looking at each of these broad classifications of reasons in detail, we highlight common strengths, weaknesses, and things to avoid and things to include for a better understanding of how a financial expert can withstand or fail a challenge.

Overall Challenge Statistics

The PwC survey also shows an increasing number of challenges per year. During the six years from 2000 to 2005 of the study, 25% of the total challenges were made in 2005, and only 11% were made in 2000. Apparently, with a success rate of 50%, an increasing number of attorneys are trying to make use of this tactic to their advantage.

In the first three years of the study, plaintiff experts faired far worse than defendant experts. In 2004 and 2005, though, the differences between plaintiff experts and defense experts narrowed (see, Figure 2, below). From 2000 to 2005, the study showed that plaintiff expert challenges comprised two-thirds of total challenges, with defendant expert challenges coming in at one-third of the total. With clearer guidelines, and more case law, challenges have become more sophisticated, with attorneys refining their knowledge of how and when to challenge defendant experts, as well as how and when to challenge plaintiff experts.

[IMGCAP(2)]

Here's a year-to-year breakdown of challenges and exclusions:

• From 2000 to 2003, once an expert was challenged, plaintiff experts were excluded in whole or in part 80% of the time, with defense experts excluded in similar fashion 20% of the time.
• By 2004, things changed, with 54% of plaintiff experts excluded, and 45% of defense experts being excluded once challenged.
• In 2005, 65% of plaintiff experts were excluded, once challenged, and 35% of defense experts were excluded.

Apparent trend: More parity of exclusion of defense and plaintiff experts after 2003, although from 2000 to 2003, significantly more plaintiff experts were excluded.

A Detailed Look At Why Experts Are Excluded

Understanding the three reasons most often cited by the court when experts were excluded will help clarify the standards. The three most commonly cited reasons are:

1. Lack of reliability;
2. Lack of relevance; and
3. Lack of qualifications.

The most frequently cited reasons for exclusion of an expert in all years, in descending order of importance:

• Reliability;
• Relevance; and
• Qualifications (see, Figure 3, below).

[IMGCAP(3)]

In the PwC study, because more than one reason might be cited, the percentages for all three reasons in a year may add up to more than 100%. Consider, too, that the courts have broad latitude in interpreting these three general categories. Looking at some recent example cases may be the best way to understand trends in how courts are viewing financial expert testimony and reports.

Reliability

Reliability does not mean certainty, but it involves more than speculation, regardless of the expert's expertise. An opinion is reliable if it is supported by objective evidence analyzed in a generally accepted manner within the expert's specialty or industry expertise. The court must be convinced that it can rely on the expert to explain facts the court cannot otherwise understand completely, or provide information not generally understood or known.

Craftsmen Limousine

In Craftsman Limousine Inc. v. Ford Motor Company, 363 F.3d 761 (U.S. App. 2004), the court excluded the testimony and report of an otherwise qualified expert because of the application of the theory or technique used by the expert to calculate the damages. The omission of an economic analysis and consideration of other possible causes for the decline in the plaintiff's business was enough for the court to exclude the expert's report.

One of the traps that financial experts fall into is failing to realize that the numbers on which they are basing their opinions are not merely numbers but representations of an underlying reality. In the Craftsman case, that reality is the number of custom-made limousines built per year. Cole, their expert, projected that Craftsman would maintain a 64% growth rate year over year, but the record does not show that Cole demonstrated how that was physically possible in terms of the number of limousines per year, the staffing needed and the production space required for such growth.

The defense enlisted the assistance of an industry trade group to bring the underlying economy and market conditions to the forefront. Almost every business is in a market served by some trade association. Obtaining third-party data from industry trade groups or other independent sources to crosscheck conclusions in an expert's report is an excellent strategy for bringing the expert's numbers out of the realm of the theoretical and into the reality of the marketplace.

Progressive Casualty

In Progressive Casualty Insurance Company and Progressive Gulf Insurance Company v. All Care, Inc., No. 2003-CA-01197-COA (Court of Appeals of Mississippi), the expert's report discussed only numbers, just as the excluded expert in the Craftsman case did, but the rest of the plaintiff's case and evidence showed the economic reality. The financial expert measured the business decline about the time the defendant, Muench, began the alleged bad conduct. The expert's report drew the conclusion that the defendant's action caused the decline based on the proximity of the decline and the defendant's alleged actions. The plaintiff's team presented evidence from referral sources demonstrating specific examples of the negative impact on the plaintiff's business due to the defendant's actions. The evidence in the Progressive case bolstered what was a fatal flaw in the Craftsman case.

But unlike in the Craftsman case, in Progressive the court allowed the expert's report, and let the jury decide on the amount of damage after the expert was subjected to cross-examination. The plaintiff's team produced enough witnesses to illustrate for the court the underlying reality behind the numbers in the expert's report. By illustrating the behavior of customers during a trial phase unrelated to the numbers, the plaintiff's team persuaded the court to allow the jury to listen to the expert's testimony.

Reliability Conclusion

These two cases, with differing results, show the importance of grounding a financial expert's report in the underlying economic reality of the client's business. In one case, the expert did not take into account the general economy, especially the emergence of two new competitors. This expert's report was excluded. In the other case, the expert's report did not take into account the general economy, but the rest of the trial testimony did demonstrate, on a microeconomic level, the impact of the defendant's actions on about five significant customers of the plaintiff. The court acknowledged the shortcoming of the expert's report, but allowed it because of the complimentary testimony offered in support of proving that the defendant's actions had an impact.

Relevance

Federal Rule of Evidence 401 defines relevant evidence as 'evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.'

TIG Insurance

It's easy to understand the irrelevance causing the partial exclusion of a financial expert in TIG Insurance Company v. Newmont Mining Corporation, NO. 04 Civ. 4105(SAS) (Nov. 8, 2005 U.S. District Court, S.D. New York). The court partially excluded the expert's report where he tried to calculate his own version of what prejudgment interest should be, without regard for what New York State law said.

In this case, the expert's description of why interest is earned and what interest is designed to compensate the lender for was irrelevant because New York provided for the payment of interest at a statutory rate. The court allowed an expert to calculate the statutory interest payable even though it could do the calculation without assistance. Even if the report is clear, reliable and done by a well qualified expert, if the law or facts are clear, without need for an expert's interpretation, then the report may have no value to the court.

Acceptance Insurance

The court, in Acceptance Insurance Companies, Inc., Securities Litigation. No. 8:99-CV-547. (U.S. District Court, D. Nebraska, March 31, 2004), laid out the requirement that the underlying facts must be supplied to demonstrate to the court how the expert's opinions were determined.

It may be tempting to hire an expert to give an opinion that tells the court what conclusion it should draw, but without the objective evidence to allow the court to understand the basis of that conclusion, the expert is exposed to a risk of exclusion. In the Acceptance Insurance case, this is exactly why the financial expert was excluded. The expert drew a conclusion, did not provide the court with the reasoning or facts for that conclusion, and expected the court to draw the same conclusion. The court rejected the expert's report.

Relevance Conclusion

Relevance can be summed up by asking 'So what?' Even if everything the expert says is true, when the law overrules the valid reasoning of the expert, as it did in the TIG case, there's no reason for the expert report; it's redundant. In the Acceptance case, the expert drew a conclusion without underlying objective evidence being presented. That meant that when the expert draws a conclusion, without telling the court why, and without providing supporting objective evidence for the conclusion, the predictable result is that the court will exclude the expert's opinion and report.

Qualifications

Qualifications are often more than just the expert's curriculum vitae; indeed, qualifications can also include how that expert's firm does the work and who holds the credentials. No one would challenge the credentials of University of Chicago Nobel Prize-winning economist Robert Lucas, but his testimony was excluded. In Brand Name Prescription Drugs Antitrust Litigation, 94 C 897 (MDL 997 U.S. District Court for the Northern District of Illinois, Eastern Division, 1999 U.S. Dist. LEXIS 550; 1999-1 Trade Cas. (CCH) P72,446), the court found that the expert did not do enough of the work himself. The lawyers drafted much of the expert's report and the expert drew his conclusion within 40 hours of receiving the case. Lesson: An impeccable list of credentials will not save an expert from a challenge if the expert cannot show that he or she actually did the work, or closely supervised the work.

Addus Healthcare

In Chartwell v. Addus Healthcare, U.S. Bankruptcy Court for the Eastern District of New York, 334 B.R. 89 (2005 Bankruptcy), the expert was excluded because of qualifications and reliability. The court allowed the testimony of Peltz, the defense expert, only with Peltz as a rebuttal witness. The opposing lawyer received everything needed to obtain Peltz's disqualification from Peltz's own testimony. He admitted that he does not do business-valuation reports, and he admitted that he had no formal training, but that his staff did.

The person with the knowledge, training and credentials is the person who should be presented to the court. The requirement that an expert is qualified will be met only if the court can see, first hand, that the testimony by the person with the qualifications. A corporate entity is no substitute for the person. The plaintiffs were able to get enough evidence to sustain the disqualification of Peltz from voir dire testimony. Peltz was also disqualified based on the reliability of his methodology in valuing the business in this case.

In this case, the defense and the plaintiff experts agreed on a common higher authority, Dr. Shannon Pratt. Once the experts accepted a higher authority, the court was right to hold them to that authority's standard. The authority specified a method that should be used in the facts and circumstances of the case. Peltz didn't use this method, and the plaintiff's expert did.

Qualifications Conclusion

When an expert lacks the proper education and qualifications for a particular case, the chance for use of improper sound financial projection tools is high. In this case, the plaintiffs first secured Peltz's acceptance of a standard that subsequently he was shown not to meet in that instance.

Although qualifications are not cited as often as reliability or relevance as a reason for disqualification, if they can be proven, through the expert's own admission, it is a reason that is easier to understand. A careful voir dire of an expert before hiring can save headaches later in the case. The fine reputation of the corporate entity that the expert works for will not insulate that expert from having to prove his or her individual qualifications.

Summary

The amended e-discovery rules that went into effect Dec. 1 may give rise to challenges based on the relevance of the request, or on the burdensome nature of the request. Knowledge of where data is housed within a company's IT system is imperative in making relevant, efficient discovery requests. This same knowledge is required to resist unreasonable requests. Once there is more data available on e-discovery challenges, a study may have the statistics needed to draw conclusions from a financial expert's viewpoint.

The trends shown in the PwC study of 2249 expert challenges reveal that from 2000 to 2005, challenges increased. The prudent expert and counsel should read his or her expert's report and prepare for the expert's deposition as if a challenge will be made. The Daubert criteria for reliability, and Rule 702's mandate that the report be helpful to the court, should be the yardstick used to measure the report before it's final.

When reviewing an expert before hiring, and his or her report or testimony subsequent to hiring, one should evaluate the expert's training and credentials. Be sure, too, that the expert being hired is doing enough of the work or closely supervising the work so that he or she can be the appropriate person to testify. In the report, it's not enough to show that a business did poorly ' the report should show a clear relationship between the poor performance and the actions alleged in the case.

Editor's note: In this edition, we offer the second of a two-part article on the challenge of financial experts as witnesses in cases in which e-discovery is relevant. In Part 1, which appeared in the February edition of e-Discovery Law & Strategy, our expert author from PricewaterhouseCoopers provided an overview of how a financial expert can help counsel in e-discovery and litigation strategy. In this month's article, Michael LoGiudice examines instances of financial experts being challenged and excluded from cases ' and how to avoid exclusion. We reprint the first two sections of February's article for background and continuity. Click here to see the February article.

The well-known Daubert case was decided in 1993. Kumho Tire was decided in 1999. Challenges to financial experts under the rules outlined by Daubert and Kumho Tire are increasing.

In December, amendments to the Federal Rules of Civil Procedure ('FRCP') affecting e-discovery went into effect. These rules are likely to give rise to challenges for a variety of reasons. The challenges, for instance, may result from discovery requests being perceived as allegedly overly burdensome or irrelevant.

Because the rules went into effect just three months ago, there's not much data on challenges, successes and failures; on the other hand, there's enough data on challenges citing Kumho Tire and Daubert for PricewaterhouseCoopers ('PwC') to have done a study and drawn some conclusions.

Financial-expert reports and e-discovery requests are closely intertwined. The financial expert's report may depend on a company's financial information. That financial information will be more easily analyzed if it's obtained electronically. That means, then, that financial experts may be helpful in mounting or defending against challenges to e-discovery requests.

Expert Report v. e-Discovery Request

There's no reason why an attorney shouldn't understand his or her financial expert's report, but it may be a different story when it comes to understanding the underlying data needs required to complete the investigation, data-gathering or other due diligence required to form the financial expert's opinion.

A financial expert's role is to take situations that may not be easy for a layperson to understand and make them understandable. That's the principal reason why, at a minimum, the attorney hiring the financial expert should be able to understand the financial expert's report. And it's also why the financial expert's documentation needs may not be so easy to understand.

The complex situation that needs to be made understandable to the lawyer, court and, possibly to the jury, is represented in the underlying data. The issues in the case, along with the financial expert's training and experience, will dictate what's needed to quantify the impact of the actions in question. Although it's reasonable to expect the lawyer to understand the financial expert's report, it would be unreasonable to expect a lawyer without an accounting, finance or commercial background to understand what documents are needed to form an opinion, and what documents a company usually retains in electronic or hardcopy form. It would also be unreasonable to expect a lawyer without an accounting, finance or commercial background to understand how the underlying data can be used to create a model to simulate the business behavior 'but for' the actions in question. It is reasonable, though, to expect a lawyer, judge and jury to understand, where applicable, the model and report that the expert creates from that underlying data.

The financial expert's report will be presented to the court or a jury. In either case, one cannot expect that the report will be used by sophisticated financial professionals. That's why the financial expert is hired: to make the financial information easy for the court or jury to understand. If the lawyer hiring the financial expert cannot understand his or her own expert's report, then how can that lawyer expect the court or jury to understand it?

Expert Witness Challenges

'Daubert Challenges to Financial Expert Witnesses in Federal and
State Courts 2000 – 2005, June 20, 2006,' by Aron Levko, ASA, CMC, CPIM, Laurence Ranallo, CPA, and Aijun Besio, Ph.D., is the ('PwC') study based on a search of published opinions in federal and state courts, not reflecting bench rulings on motions, or other unpublished cases. This recent PwC study shows that once challenged, experts are wholly or partially excluded nearly 50% of the time (see, Figure 1, below). When narrowed to the financial-expert challenges in the study ' which involved 410 subjects ' the nearly 50% exclusion rate still held true. The total scope included 2,249 expert challenges from 1,708 cases citing Kumho Tire.

[IMGCAP(1)]

Lack of reliability was the most frequent reason why financial experts were excluded. Lack of relevance and improper qualifications were the second and third reasons, respectively. By looking at each of these broad classifications of reasons in detail, we highlight common strengths, weaknesses, and things to avoid and things to include for a better understanding of how a financial expert can withstand or fail a challenge.

Overall Challenge Statistics

The PwC survey also shows an increasing number of challenges per year. During the six years from 2000 to 2005 of the study, 25% of the total challenges were made in 2005, and only 11% were made in 2000. Apparently, with a success rate of 50%, an increasing number of attorneys are trying to make use of this tactic to their advantage.

In the first three years of the study, plaintiff experts faired far worse than defendant experts. In 2004 and 2005, though, the differences between plaintiff experts and defense experts narrowed (see, Figure 2, below). From 2000 to 2005, the study showed that plaintiff expert challenges comprised two-thirds of total challenges, with defendant expert challenges coming in at one-third of the total. With clearer guidelines, and more case law, challenges have become more sophisticated, with attorneys refining their knowledge of how and when to challenge defendant experts, as well as how and when to challenge plaintiff experts.

[IMGCAP(2)]

Here's a year-to-year breakdown of challenges and exclusions:

• From 2000 to 2003, once an expert was challenged, plaintiff experts were excluded in whole or in part 80% of the time, with defense experts excluded in similar fashion 20% of the time.
• By 2004, things changed, with 54% of plaintiff experts excluded, and 45% of defense experts being excluded once challenged.
• In 2005, 65% of plaintiff experts were excluded, once challenged, and 35% of defense experts were excluded.

Apparent trend: More parity of exclusion of defense and plaintiff experts after 2003, although from 2000 to 2003, significantly more plaintiff experts were excluded.

A Detailed Look At Why Experts Are Excluded

Understanding the three reasons most often cited by the court when experts were excluded will help clarify the standards. The three most commonly cited reasons are:

1. Lack of reliability;
2. Lack of relevance; and
3. Lack of qualifications.

The most frequently cited reasons for exclusion of an expert in all years, in descending order of importance:

• Reliability;
• Relevance; and
• Qualifications (see, Figure 3, below).

[IMGCAP(3)]

In the PwC study, because more than one reason might be cited, the percentages for all three reasons in a year may add up to more than 100%. Consider, too, that the courts have broad latitude in interpreting these three general categories. Looking at some recent example cases may be the best way to understand trends in how courts are viewing financial expert testimony and reports.

Reliability

Reliability does not mean certainty, but it involves more than speculation, regardless of the expert's expertise. An opinion is reliable if it is supported by objective evidence analyzed in a generally accepted manner within the expert's specialty or industry expertise. The court must be convinced that it can rely on the expert to explain facts the court cannot otherwise understand completely, or provide information not generally understood or known.

Craftsmen Limousine

In Craftsman Limousine Inc. v. Ford Motor Company , 363 F.3d 761 (U.S. App. 2004), the court excluded the testimony and report of an otherwise qualified expert because of the application of the theory or technique used by the expert to calculate the damages. The omission of an economic analysis and consideration of other possible causes for the decline in the plaintiff's business was enough for the court to exclude the expert's report.

One of the traps that financial experts fall into is failing to realize that the numbers on which they are basing their opinions are not merely numbers but representations of an underlying reality. In the Craftsman case, that reality is the number of custom-made limousines built per year. Cole, their expert, projected that Craftsman would maintain a 64% growth rate year over year, but the record does not show that Cole demonstrated how that was physically possible in terms of the number of limousines per year, the staffing needed and the production space required for such growth.

The defense enlisted the assistance of an industry trade group to bring the underlying economy and market conditions to the forefront. Almost every business is in a market served by some trade association. Obtaining third-party data from industry trade groups or other independent sources to crosscheck conclusions in an expert's report is an excellent strategy for bringing the expert's numbers out of the realm of the theoretical and into the reality of the marketplace.

Progressive Casualty

In Progressive Casualty Insurance Company and Progressive Gulf Insurance Company v. All Care, Inc., No. 2003-CA-01197-COA (Court of Appeals of Mississippi), the expert's report discussed only numbers, just as the excluded expert in the Craftsman case did, but the rest of the plaintiff's case and evidence showed the economic reality. The financial expert measured the business decline about the time the defendant, Muench, began the alleged bad conduct. The expert's report drew the conclusion that the defendant's action caused the decline based on the proximity of the decline and the defendant's alleged actions. The plaintiff's team presented evidence from referral sources demonstrating specific examples of the negative impact on the plaintiff's business due to the defendant's actions. The evidence in the Progressive case bolstered what was a fatal flaw in the Craftsman case.

But unlike in the Craftsman case, in Progressive the court allowed the expert's report, and let the jury decide on the amount of damage after the expert was subjected to cross-examination. The plaintiff's team produced enough witnesses to illustrate for the court the underlying reality behind the numbers in the expert's report. By illustrating the behavior of customers during a trial phase unrelated to the numbers, the plaintiff's team persuaded the court to allow the jury to listen to the expert's testimony.

Reliability Conclusion

These two cases, with differing results, show the importance of grounding a financial expert's report in the underlying economic reality of the client's business. In one case, the expert did not take into account the general economy, especially the emergence of two new competitors. This expert's report was excluded. In the other case, the expert's report did not take into account the general economy, but the rest of the trial testimony did demonstrate, on a microeconomic level, the impact of the defendant's actions on about five significant customers of the plaintiff. The court acknowledged the shortcoming of the expert's report, but allowed it because of the complimentary testimony offered in support of proving that the defendant's actions had an impact.

Relevance

Federal Rule of Evidence 401 defines relevant evidence as 'evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence.'

TIG Insurance

It's easy to understand the irrelevance causing the partial exclusion of a financial expert in TIG Insurance Company v. Newmont Mining Corporation, NO. 04 Civ. 4105(SAS) (Nov. 8, 2005 U.S. District Court, S.D. New York). The court partially excluded the expert's report where he tried to calculate his own version of what prejudgment interest should be, without regard for what New York State law said.

In this case, the expert's description of why interest is earned and what interest is designed to compensate the lender for was irrelevant because New York provided for the payment of interest at a statutory rate. The court allowed an expert to calculate the statutory interest payable even though it could do the calculation without assistance. Even if the report is clear, reliable and done by a well qualified expert, if the law or facts are clear, without need for an expert's interpretation, then the report may have no value to the court.

Acceptance Insurance

The court, in Acceptance Insurance Companies, Inc., Securities Litigation. No. 8:99-CV-547. (U.S. District Court, D. Nebraska, March 31, 2004), laid out the requirement that the underlying facts must be supplied to demonstrate to the court how the expert's opinions were determined.

It may be tempting to hire an expert to give an opinion that tells the court what conclusion it should draw, but without the objective evidence to allow the court to understand the basis of that conclusion, the expert is exposed to a risk of exclusion. In the Acceptance Insurance case, this is exactly why the financial expert was excluded. The expert drew a conclusion, did not provide the court with the reasoning or facts for that conclusion, and expected the court to draw the same conclusion. The court rejected the expert's report.

Relevance Conclusion

Relevance can be summed up by asking 'So what?' Even if everything the expert says is true, when the law overrules the valid reasoning of the expert, as it did in the TIG case, there's no reason for the expert report; it's redundant. In the Acceptance case, the expert drew a conclusion without underlying objective evidence being presented. That meant that when the expert draws a conclusion, without telling the court why, and without providing supporting objective evidence for the conclusion, the predictable result is that the court will exclude the expert's opinion and report.

Qualifications

Qualifications are often more than just the expert's curriculum vitae; indeed, qualifications can also include how that expert's firm does the work and who holds the credentials. No one would challenge the credentials of University of Chicago Nobel Prize-winning economist Robert Lucas, but his testimony was excluded. In Brand Name Prescription Drugs Antitrust Litigation, 94 C 897 (MDL 997 U.S. District Court for the Northern District of Illinois, Eastern Division, 1999 U.S. Dist. LEXIS 550; 1999-1 Trade Cas. (CCH) P72,446), the court found that the expert did not do enough of the work himself. The lawyers drafted much of the expert's report and the expert drew his conclusion within 40 hours of receiving the case. Lesson: An impeccable list of credentials will not save an expert from a challenge if the expert cannot show that he or she actually did the work, or closely supervised the work.

Addus Healthcare

In Chartwell v. Addus Healthcare, U.S. Bankruptcy Court for the Eastern District of New York, 334 B.R. 89 (2005 Bankruptcy), the expert was excluded because of qualifications and reliability. The court allowed the testimony of Peltz, the defense expert, only with Peltz as a rebuttal witness. The opposing lawyer received everything needed to obtain Peltz's disqualification from Peltz's own testimony. He admitted that he does not do business-valuation reports, and he admitted that he had no formal training, but that his staff did.

The person with the knowledge, training and credentials is the person who should be presented to the court. The requirement that an expert is qualified will be met only if the court can see, first hand, that the testimony by the person with the qualifications. A corporate entity is no substitute for the person. The plaintiffs were able to get enough evidence to sustain the disqualification of Peltz from voir dire testimony. Peltz was also disqualified based on the reliability of his methodology in valuing the business in this case.

In this case, the defense and the plaintiff experts agreed on a common higher authority, Dr. Shannon Pratt. Once the experts accepted a higher authority, the court was right to hold them to that authority's standard. The authority specified a method that should be used in the facts and circumstances of the case. Peltz didn't use this method, and the plaintiff's expert did.

Qualifications Conclusion

When an expert lacks the proper education and qualifications for a particular case, the chance for use of improper sound financial projection tools is high. In this case, the plaintiffs first secured Peltz's acceptance of a standard that subsequently he was shown not to meet in that instance.

Although qualifications are not cited as often as reliability or relevance as a reason for disqualification, if they can be proven, through the expert's own admission, it is a reason that is easier to understand. A careful voir dire of an expert before hiring can save headaches later in the case. The fine reputation of the corporate entity that the expert works for will not insulate that expert from having to prove his or her individual qualifications.

Summary

The amended e-discovery rules that went into effect Dec. 1 may give rise to challenges based on the relevance of the request, or on the burdensome nature of the request. Knowledge of where data is housed within a company's IT system is imperative in making relevant, efficient discovery requests. This same knowledge is required to resist unreasonable requests. Once there is more data available on e-discovery challenges, a study may have the statistics needed to draw conclusions from a financial expert's viewpoint.

The trends shown in the PwC study of 2249 expert challenges reveal that from 2000 to 2005, challenges increased. The prudent expert and counsel should read his or her expert's report and prepare for the expert's deposition as if a challenge will be made. The Daubert criteria for reliability, and Rule 702's mandate that the report be helpful to the court, should be the yardstick used to measure the report before it's final.

When reviewing an expert before hiring, and his or her report or testimony subsequent to hiring, one should evaluate the expert's training and credentials. Be sure, too, that the expert being hired is doing enough of the work or closely supervising the work so that he or she can be the appropriate person to testify. In the report, it's not enough to show that a business did poorly ' the report should show a clear relationship between the poor performance and the actions alleged in the case.