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excluding expert who testified that his opinion was based solely on his client's claims and that he did not review any other relevant materials that were available to him
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95 Civ. 8136 (RCC).
December 13, 2001.
Opinion Order
Before the Court are the parties' cross motions to preclude the admission of each other's expert report on damages, as well as the testimony of each other's damages expert. The Court reviewed the parties' submissions and heard oral argument on November 29, 2001. For the reasons explained below, Plaintiff's motion to preclude is denied and Defendant's motion is granted.
I. Background
From 1963 until 1990, Plaintiff, Supply Building Company ("Plaintiff" or "Supply Building"), contracted with Defendant, Estee Lauder International ("Defendant" or "Estee Lauder"). to be its sole distributor of makeup, skin care and fragrance products in Kuwait. The arrangement was suspended during the Persian Gulf War with the Iraqi invasion of Kuwait in 1990. Supply Building alleges that it was prepared to return to business in February 1991, but that Estee Lauder made it nearly impossible to proceed. In September 1994, Estee Lauder terminated the agreement, citing Supply Building's unsatisfactory performance. Procedurally, the parties are now prepared to try the only remaining claim of pre-termination breach of the covenant of good faith and fair dealing. However, they both urge the Court to exclude the other's damages report as well as testimony from each other's expert witness.
A. Plaintiff's Expert
Plaintiff s expert, Robert A. Sherwin ("Sherwin"), submitted his damages report on May 27, 1997. Plaintiff Report, Delaney Aff. Ex. 1 (hereinafter "Plaintiff Report"). Sherwin is an economist with nearly twenty-five years of experience. He has undergraduate degrees in physics and economics, as well as a law degree. Id. at 1. He is a principal and vice president of Analysis Group, Inc., an economic consulting firm.
Sherwin states he is a Certified Public Accountant. Plaintiff's Report, Delaney All. Ex. 1 at 1; Sherwin's Resume, Delaney Ans. Aff. Ex. 15. Illinois, the state in which Sherwin is licensed, distinguishes between being licensed and being a practicing CPA. Sept. 26, 2000 Sherwin Dep., Bussey Aff Ex. 8 at 82. Sherwin is licensed, but not a practicing CPA. Id.
Sherwin presented two methods of calculating Supply Building's lost profits damages. First, in Model 1, Sherwin arrived at a damages amount by subtracting the profits Supply Building actually made in 1991-1994 from the amount it projected it would have made if Estee Lauder had shipped its products on time and in allegedly sufficient quantities during the same period. Plaintiff Report at ¶ ¶ 19-27. Sherwin claims that his analysis was based on orders Supply Building placed with Estee Lauder during the post-war years. Id. ¶ 19. However, he actually relied on a summary of orders prepared by Sami Bakir, the son of Supply Building's owner and a general manager of the company, not the orders themselves. See id. at Tab 1.
Sherwin relied on several assumptions in constructing Model 1. First, he assumed that Supply Building would sell an entire Estee Lauder order within two months of receipt. Id. ¶ ¶ 20-23. However, Sherwin admits that he never actually reviewed Supply Building's pre- or post-war records in making this assumption. Sept. 26, 2000 Sherwin Dep., Howley Aff. Ex. 3 at 57-58. Instead, he based this assumption on the assurances of Omar Bakir, a principal of Supply Building. Id. at 58. Second, Sherwin assumed that Supply Building had successfully resurrected its operations in June 1991 when it placed its first order to Estee Lauder. Plaintiff Report ¶ 20. Again, Sherwin based this assumption, in part, on Supply Building's assurances, unaware of its claim to a United Nations tribunal in which it stated it was unable to recommence operations until January 1992. Sept. 26, 2000 Sherwin Dep., Howley Aff. Ex. 3 at 90-91, 97-98.
The relevant portion of Sherwin's deposition, demonstrating that he did not examine any actual records, follows:
Q: Did you review any Supply Building records to determine whether, in fact, full shipments had been sold within two months in the past? A: What do you mean by "the past"? Q: Prewar. A: I did not review any prewar records, to the best of my recollection. Q: Did you review any prewar records in connection with any aspect of your report? A: Not SB prewar records. Again, to the best of my recollection. Q: Did you review any postwar records to determine whether, in fact, Supply Building would sell a full shipment within two months of receipt? A: No. Q: Now, for purposes of calculating damages in this case, did you operate from the an assumption that Supply Building would sell full shipments within two months of their receipt? A: On average, yes, that that would be the rate of sales. Q: What was the basis for that assumption? A: What we've already discussed. That is, the assertion from the Bakirs that that was their business sense on how long it would take for timely and complete shipments being received. Again, on average. Q: Was it based on anything else? A: I don't believe so.
Sept. 26, 2000 Sherwin Dep., Howley Aff. Ex. 3 at 57-58.
Utilizing these assumptions, Sherwin calculated what Supply Building's cost for Estee Lauder products would have been if Defendant had performed its obligations. Plaintiff Report ¶ 24. Then, using the profit margins in place during 1991-1994, Sherwin determined the revenues Supply Building would have received if it sold all of the products it ordered. Id. ¶ 27. From this amount, Sherwin subtracted what Supply Building actually did receive from its Estee Lauder sales and arrived at a damages amount of $2.95 million. Id. ¶ 41.
Alternatively, as verification for Model 1, in Model 2 Sherwin estimated Supply Building's lost profits by calculating its market share in post-war Kuwait. First, Sherwin calculated both the amount of cosmetic and skin care imports and Estee Lauder's sales in United Arab Emirates ("U.A.E."), Saudi Arabia and Qatar in the immediate post-war years. Id. ¶ ¶ 29-30. Sherwin found that Estee Lauder's post-war market share in these comparative countries had decreased by 21%. Id. ¶ 31. Sherwin then reduced Estee Lauder's pre-war market share in Kuwait by the same amount to arrive at its post-war market share. Id. Estee Lauder's market share in Kuwait would have been Supply Building's share since Supply Building was the sole distributor. Subsequently, Sherwin placed a dollar value on Supply Building's market share, assuming Estee Lauder had performed its obligations and factoring in how much it would have cost Supply Building to sell the products. Id. ¶ ¶ 32-33. Finally, using the profit margins employed in the post-war years, Sherwin calculated the revenue Supply Building would have made on selling its market share of products. Id. ¶ 34. He arrived at $2.57 million. Id. ¶ 42.
In addition to the lost profits calculations demonstrated in Model 1 and Model 2, Sherwin surmised three other types of damages. First, due to Estee Lauder's failure to ship its goods, Supply Building lost profits it would have made in selling other brands of cosmetics. Id. ¶ 43. Second, Estee Lauder did not reimburse Supply Building for its advertising and promotional costs. Id. ¶ 44. Finally, Supply Building suffered damages when Estee Lauder raised its prices and restricted Supply Building's resale prices. Id. ¶ 46. Sherwin added each of these amounts to Model 1 to conclude Supply Building's total pre-termination damages were $4.22 million.
As explained above, in calculating Model 1, Sherwin relied on a summary of orders prepared by Sami Bakir. When Estee Lauder requested that he produce the documents from which he derived his summary, Bakir discovered several errors. As a result, Sherwin recalculated Supply Building's lost profits under Method 1 and decreased the damages amount from $2.95 million to $2.89 million. The Model 2 amount did not change. The three additional forms of damages were also reduced so that the new pre-termination damages amount was $4.17 million. On December 12, 1997 Supply Building submitted its revised damages report which included indications of its corrections ("Plaintiff's Revised Report"). Plaintiff's Revised Report, Delaney Aff. Ex. 8.
B. Defendant's Expert
Defendant's expert, Theodore F. Martens ("Martens") is a Certified Public Accountant, he has an undergraduate degree in biology and a masters in business administration. He is a partner in PricewaterhouseCoopers' New York Dispute Analysis Investigations unit, he teaches several auditing classes for his employer and he has over twenty years of experience in accounting and auditing. In rebuttal to Sherwin's report on damages, Martens submitted a report on September 1. 2000. Defendant Report, Delaney Aff. Ex. 12 (hereinafter "Defendant Report"). Martens stated that he did not address Plaintiff's Revised Report because Sherwin's "fundamental approach or methodologies" did not change. Oct. 3, 2000 Martens Dep., Delaney Aff. Ex. 13 at 8-9; 141-42.
Plaintiff insists Martens is not qualified to be a damages expert in this case since he is riot a lawyer, a sociologist or cultural anthropologist, nor does he have training or experience in demographics, international affairs, the Middle East or Kuwait. Oct. 3, 2000 Martens Dep., Delaney Aff Ex. 13 at 138. Defendant submits that Martens is not trying to calculate the impact of the Gulf War on Supply Building's business. Rather, as an accountant, he is pointing out that Sherwin's conclusions are unreliable. Def. Mem. at 12.
Martens found that Sherwin's conclusions were unreliable because he did not consult Supply Building's records or its claim for damages from the United Nations, nor did he consider the effect of the Gulf War on Kuwait's economy or Supply Building's post-war ability to sell Estee Lauder products. Defendant Report at 8-10. For example, the female population of Kuwait was 31% lower the year after the war than it had been the year before. Id. at 8. Further, 500,000 middle-class expatriates fled Kuwait and did not return after the invasion. Id. Martens also claimed that while geographically similar, Saudi Arabia and U.A.E. did not suffer the same effects from the Gulf War that Kuwait did. For example, U.A.E.'s gross domestic product increased due to heightened oil production and prices. Id. at 9. Kuwait, on the other hand, did not return to pre-war production levels until the end of 1992. Id.
Defendant's Report also discusses more specific calculating and methodology errors in Plaintiff's Report, including mathematical errors that Sherwin had corrected in the Revised Report. For example, Martens explains that Estee Lauder had placed a $2 million limit on orders Supply Building could place. Id. at 13. Defendant submits that Sherwin ignored this limit and overstated the amount of Estee Lauder products Supply Building actually received. Id. Further, using the same information that Sherwin relied on, Martens calculated Supply Building's actual rate of turnover of Estee Lauder products to be approximately twice yearly, not bimonthly as Sherwin assumed. Id. at 14. In addition to the problems Martens found in Plaintiff's lost profits calculations, he also found that Sherwin's estimation of damages for non-Estee Lauder products, advertising and promotional costs and price restrictions were not supported. Id. at 19-21. With these and other errors in mind, Martens calculated $6.64 million as the sum of all of Sherwin's errors.
II. Discussion
A. Standard of Admissibility of Expert Testimony
Pursuant to Federal Rule of Evidence 702, the trial court has broad discretion in determining whether to admit expert evidence. Salem v. U.S. Lines Co., 370 U.S. 31, 35 (1962); Gen. Elec. Co. v. Joiner, 522 U.S. 136, 141 (1997) (holding trial court's rulings will be reviewed for an abuse of discretion and overturned only if manifestly erroneous). In assessing admissibility, the trial court must determine whether the expert testimony is relevant and whether it has a sufficiently "reliable foundation." Campbell v. Metro. Prop. Cas. Ins. Co., 239 F.3d 179, 184-85 (2d Cir. 2001) (citing Daubert v. Merrill Dow Pharm., Inc., 509 U.S. 579, 587 (1993)); see also Kumho Tire Co. Ltd. v. Carmichael, 526 U.S. 137, 149 (1999) (explaining the court must "ensure the reliability and relevancy of expert testimony"). "Since Daubert, . . . parties relying on expert evidence have had notice of the exacting standards of reliability such evidence must meet." Weisgram v. Marley Co., 528 U.S. 440, 455 (2000).
Federal Rule of Evidence 702 states:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill. experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.
Fed.R.Evid. 702.
Accordingly, such evidence will be excluded if it is "speculative or conjectural." Boucher v. U.S. Suzuki Motor Corp., 73 F.3d 18, 21 (2d Cir. 1996) (citing In re Air Disaster at Lockerbie Scotland, 37 F.3d 804, 824 (2d Cir. 1994)). Additionally, testimony "based on assumptions that are `so unrealistic and contradictory as to suggest bad faith,' or to be in essence an `apples and oranges comparison,'" will not be admitted.Id. (quoting Shatkin v. McDonnell Douglas Corp., 727 F.2d 202, 208 (2d Cir. 1984)). Further, under Federal Rule of Evidence 703, the court must "determine whether the expert acted reasonably in making assumptions of fact upon which he would base his testimony." Id. (quoting Shatkin v. McDonnell Douglas Corp., 727 F.2d 202, 208 (2d Cir. 1984)); see also Johnson Elec. N. Am., Inc. v. Mabuchi Motor Am. Corp., 103 F. Supp.2d 268, 284 (S.D.N Y 2000) (excluding expert testimony based on unsupported assumptions). Assumptions based on conclusory statements of the expert's client, rather than on the expert's independent evaluation are not reasonable. Argus, Inc. v. Eastman Kodak Co., 612 F. Supp. 904, 926 (S.D.N.Y. 1985). "A court may conclude that there is simply too great an analytical gap between the data and the opinion proffered." Gen. Elec., 522 U.S. at 146. Where, as here, lost profits are at issue, "an expert's testimony should be excluded as speculative if it is based on unrealistic assumptions regarding" a party's future prospects. Boucher, 73 F.3d at 21 (finding testimony was not "accompanied by a sufficient factual foundation" and therefore district court abused discretion in admitting it) (citing Gumbs v. Int'l Harvester, Inc., 718 F.2d 88, 98 (3d Cir. 1983)).
Rule 703 governs the foundation for the expert's opinion testimony and provides, in relevant part:
[t]he facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence.
Fed.R.Evid. 703.
B. Plaintiff's Expert
Defendant argues Sherwin's report and testimony should be precluded since his report is based on improper methodologies and assumptions. The Court has some doubt as to Sherwin's qualifications to serve as an expert in this case. Although he has testified in numerous cases, it is not clear in what capacity he has been recognized as having expertise, nor is it clear what "specialized knowledge" Mr. Sherwin can provide here. See Fed.R.Evid.702. For the purposes of this case, it seems a witness with expertise in accounting would seem to be more useful. Yet, the Court need not be detained by the appropriateness of Sherwin's background and training as the assumptions upon which his report rests are "too unsupportable and far-reaching to be reasonably certain." Kidder, Peobody Co., Inc. v. IAG Int'l Acceptance Group N.V., 28 F. Supp.2d 126, 137 (1996).
As Defendant points out, Plaintiff does not and cannot cite a place in the record demonstrating that Sherwin reviewed Supply Building's records rather than relying on his client's conclusory statements. See, e.g., Sept. 26, 2000 Sherwin Dep., Howley Aff Ex. 3 at 57-58; Sept. 26, 2000 Sherwin Dep., Bussey Aff. Ex. 8 at 74 (Q: "Did you base that assumption on anything other than what the Bakirs told you?" A: No, other than my belief that their qualifications back up that assertion."). Sherwin admits he did not review any pre- or post-war records to determine if it was reasonable to expect that Supply Building would turn over its Estee Lauder inventory every two months. Sept. 26, 2000 Sherwin Dep., Howely Aff. Ex. 3 at 57-58. Further, with respect to his assumption that Supply Building could resume business in June 1991, Sherwin admits he was unaware of Supply Building's claim to the U.N. that it could not return to business until January 1992. Id. at 97.
Plaintiff maintains that Sherwin's damages calculation based on orders Supply Building actually placed after the war is buttressed by Kuwait Ministry of Planning and United Nations statistics demonstrating that cosmetics and fragrance sales increased in Kuwait in the years following the war. Plaintiff Report at tab 6; Defendant Report at tab 5. However, orders standing alone cannot prove a company's sales or profits. Sherwin incorrectly assumes that everything Supply Building ordered would be sold. Moreover, Sherwin's assumptions about Supply Building's post-war performance are belied by actual circumstances. Omar Bakir, a Supply Building general manager for thirty-five years did not return to Kuwait after the war. Oct. 3, 1996 Omar Bakir Dep., Bussey Aff. Ex. 9 at 164. Further, Supply Building "did away" with its own stores after the war. October 1, 1996 Sami Bakir Dep., Bussey Aff. Ex 10 at 199.
Sherwin based his report on his client's unrealistic assurances rather than available records. Further, the client's guarantees were not reliable and were contradicted by other data available to Sherwin. This is not the type of shortcut to be expected from an economist with twenty five years experience. See Kumho Tire Co., 526 U.S. at 149 (noting that an expert must employ "in the courtroom the same level of intellectual rigor that characterizes" his practice in the relevant field); see also Brooks v. Outboard Marine Corp., 234 F.3d 89, 92 (2d Cir. 2000) (approving trial court's exclusion of expert who failed to review several pieces of relevant and available evidence). Accordingly, as an insufficient factual basis exists for the assumptions upon which Model I rests, the Court finds Plaintiff's report and Sherwin's expert testimony are unreliable and, therefore, inadmissible.
Defendant also takes issue with Sherwin's methodology in Method 2. As Method 2 only serves a check on Method 1 and not an independent basis for assessing damages, the Court finds it unnecessary to consider these arguments since the assumptions underlying Method 1 are unreasonable.
C. Defendant's Expert
The crux of Plaintiff's argument in support of precluding Martens' testimony is that he did not consider Plaintiff's Revised Report and his report actually critiqued Sherwin's mathematical and accounting errors, not his methods. Plaintiff's expert's report and testimony are precluded, so the point is somewhat moot. However, after reviewing Defendant's Report and Plaintiff's Revised Report, the Court is satisfied that Martens' objections are methodological in nature and not rectified by the Revised Report. The Revised Report still utilizes the assumptions with which Martens took issue and which the Court finds unreasonable. Accordingly, since the Court presumes admissibility and Plaintiff has not convinced it that Martens' testimony will be unreasonable and unreliable, Plaintiff's motion is denied.
However, to the extent that Martens' report and testimony are based on his objections to Sherwin's inadmissible report, they will be precluded. The Court will consider the admissibility of Martens' testimony that is based on his own review of Supply Building's records and his accounting background and experience.
III. Conclusion
For the reasons explained above, Defendant's motion to exclude Plaintiff's Report and its expert, Robert Sherwin, is granted. Plaintiffs motion to preclude the admissibility of Defendant's Report as well as its expert, Theodore Martens, is denied with the conditions explained.
So ordered.