The case of Blythe v. Bell is like the gift that keeps on giving. It generated two significant opinions last year, and this week a third and a fourth. The July 2012 opinion was a major e-discovery decision, and the December 2012 opinion addressed an important issue about the assignment of LLC interests.
Today’s post is about the Blythe v. Bell opinion numbered 2013 NCBC 8, on the subject of expert testimony. In this third Blythe opinion, Defendants had moved to exclude the testimony of Plaintiffs’ expert witness, Barbee, on the grounds that he was not qualified to render his opinion and that his methodology was deficient.
Barbee, a CPA, had offered testimony that the Plaintiffs’ damages were lost profits consisting of more than ten million dollars, including “historic lost profits” of about $3.3 million; and “additional lost profits” of about $7.4 million. Defendants’ Motion to Exclude at ¶7.
Remember that it is very tough to prove lost profit damages in North Carolina. As Judge Gale held,
[w]hile the courts do not demand mathematical certitude in calculating
lost profits, they do not countenance conjecture or speculation, and conjecture or
speculation does not become admissible simply because it is presented by an expert.
Op. ¶19. He also said that while the amount of damages to be awarded is for the jury to determine, "the court determines as a matter of law whether the evidence would allow a jury to calculate lost profits with reasonable certainty." Op. Par. 20.
Furthermore, the expert testimony must "pass the realm of conjecture, speculation, or opinion not founded on facts, and must consist of actual facts from which a reasonably accurate conclusion regarding the cause and the amount of the loss can be logically and rationally drawn." Op. ¶20 (quoting Overnite Transp. Co. v. Int’l Brotherhood of Teamsters, 257 N.C. 18, 30, 125 S.E.2d 277, 286 (1962).
The Defendants attacked Barbee’s expertise, saying that he was not a qualified expert on the subject of marketing and that the method he had used to calculate lost profits was not reliable enough to pass muster.
Judge Gale gave a nod of approval to Barbee’s expertise, saying that he was well qualified in the field of damages calculations. He had the qualifications many of us look for when hiring a financial expert, like certifications from the American Institute of Certified Public Accountants in the areas of business valuation and financial forensics.
The AICPA puts limitations on a CPA’s methods of calculating lost profits. One of its publications counsels against speculation, saying that "damages for lost profits are recoverable only if the plaintiff can prove the damages related to lost profits are reasonable and that they have been calculated using reliable factors without undue speculation." Op. ¶16 (quoting Richard A. Pollack, et al, AICPA, Calculating Lost Profits, Ch. 58 ¶¶ 52-53 (2006)).
Judge Gale ruled that Barbee’s calculation of lost profits crossed the line into "conjecture and speculation" and that it should be excluded from evidence. Op. ¶5.
So where did Barbee leave the terra firma of "reliable factors" and enter the world of "conjecture and speculation"? His calculation assumed that one of the Plaintiffs would have increased its sale of the socks that were central to the lawsuit and thereby its profits. He based that calculation upon an assumption that the Plaintiffs would have had more dollars available to spend on marketing to increase sales. He didn’t specify how the dollars would have been spent or how they would have generated new sales.
But if you are cheering for the Blythe side of this case, all wasn’t lost. Part of Barbee’s calculation of lost profits withstood Judge Gale’s scrutiny. That portion (the "historic" lost profits of $3.3 million) didn’t involve a projection of sales which hadn’t happened, but instead was based on actual sales. Even so, the Blythe side of the case had their damages reduced by 75%.