In many cases, the need for a valuation expert is obvious and inescapable, which raises the question of how to choose and use an expert to the best advantage for a legal argument. Recent case law offers some tips in answer to this question.
It doesn’t pay to skimp.
In Villaje del Rio, Ltd. V. Colina, L.P., 2009 WL 1606431 (W.D. Tex.) (June 8, 2009), the developer/plaintiff tried to cut costs by designating himself an expert to testify in regards to the value of his own real estate project, and supplemented his own with two experts’ testimony, based on appraisals they prepared in connection with the project’s financing, two years prior to the insolvency at issue. The court struck the appraisal experts for their failure to consider the relevant facts and data of the actual insolvency, and the plaintiff as well, saying, “lay testimony results from a process of reasoning familiar in everyday life, while expert testimony results from a process of reasoning which can be mastered only by specialists in the field.”
A cost efficient compromise.
Although a plaintiff often has no choice but to present an expert, the defendant may have other options. In Sossikian v. Ennis, 2009 WL 2106106 (Cal. App. 1 Dist.) (July 16, 2009) (unpublished), the defendant found an ideal solution, by using an expert for rebuttal purposes only to discredit the damages evidence offered by the plaintiff’s expert. This choice left the jury with no basis for a damages award and they awarded $42,182 on the plaintiff’s $800,000 claim.
Who is qualified?
When you make the decision to incur the cost of an expert, you want to make sure it’s the right one. In MDG Internat’l v. Australian Gold, Inc., 2009 WL 1916728 (S.D. Ind.) (June 29, 2009), an otherwise “supremely qualified” expert failed to satisfy the requirements of the Federal Rules of Evidence and Daubert. The expert, a professor of accounting and chair of an accredited MBA program deeply experienced in valuing public companies, was engaged to value a private company. The court concluded that he lacked the requisite “knowledge, skill, experience, training, or education” to testify regarding the value of the closely held business at issue, and went on to find that the expert’s opinions and methodologies were riddled with deficiencies. “Expert” is not broadly defined. It is critical to engage someone experienced in the particular issue of the case.
Of course, there are always outlier situations.
Chick-Fil-A v. CFT Development, LLC, 2009 WL 1754058 (M.D. Fla.) (June 18, 2009) is one such case. At issue was whether Panda Express (the defendant), which was proposed to be built next to a Chick-Fil-A, would derive 25% or more of its gross sales from the sale of chicken (and thus be enjoined from opening under a restrictive covenant on the property). The plaintiff’s and defendant’s experts proposed alternative methods of calculating the 25%, and both parties filed Daubert motions, claiming the other’s expert was unreliable or irrelevant. In the absence of any precedents (legal or accounting) on how to calculate the percentage of sales from chicken (for example, does it include non-chicken ingredients in a chicken dish?), the court permitted both experts to testify, saying that “the certainty and correctness will be tested through cross-examination and presentation of contrary evidence.”
Not all experts face the Daubert test.
Certain states continue to use a hybrid of that new federal rule and their own standard, based on the so-called Frye rule (from Frye v. United States, 54 App. D.C. 46 (1923)), even though Daubert overruled that case. The Frye test requires that an expert’s opinion derive from a principle that is “sufficiently established to have gained general acceptance in the particular field in which it belongs.” This was the test used by the court in 8000 Maryland LLC v. Huntleigh Financial Services, Inc., 2009 WL 2144895 (Mo. App. E.D.) (July 21, 2009). There the court of appeals affirmed that the plaintiff’s expert, a CPA/ABV, ASA, CVA with a master’s degree in finance and twenty-five years experience valuing public and private companies, had based her conclusions on facts and data reasonably relied on by similar experts.
Watch your expert’s language.
You’ve hired an expert. They’ve passed the hurdle of court acceptance. They give their opinion. It goes without saying (or does it?) that that opinion needs to be powerful, well presented, and not based on speculation. In Lucent Technologies, Inc. v. Gateway, Inc., 2009 WL 2902044 (C.A. Fed.) (Sept. 11, 2009), the plaintiff’s expert’s patent damages calculation, which resulted in a jury award of $358 million, was thrown out (and the jury award reversed), based largely on the expert’s testimony that to calculate a lump-sum amount (of damages), the parties might start by looking at the running royalty “and then speculating as to the extent of the future use” (emphasis by court). Perhaps it was semantics, (the expert might just as easily have said “estimate”), but the court held that what it dubbed the “lump sum speculation theory” improperly suggested guesswork, not rigorous analysis. The court went on to bolster its decision, finding that the expert’s comparables had no probative value, as the technology at issue was unique and difficult to compare meaningfully.
The bottom line: it pays to hire an expert, but be sure it’s the right expert doing the best job possible.