Excluding the well-qualified witness:
Junk in Ivy-League tweed.

One of our recent cases illustrates a common kind of junk expert testimony that is susceptible to the careful technical lawyering that we help our law-firm clients provide to their corporate/commercial clients. The alleged expert in this case was somewhat typical of the cream of professional damages experts. He is an Economics Ph.D. from a top Ivy League university and Vice President and Director of Economic Services for a Big-4 accounting firm. He was clearly "qualified," even under a fairly strict Daubert standard. If he had been allowed to take the stand the jury would have received him as a well-credentialed expert who had a pretty convincing story to tell them. Nice hair. Toothy grin and smooth delivery. A fairly typical situation.

And he had a story that is routinely admitted: An alleged intellectual property wrong committed against the plaintiff's business kept the business from becoming worth hundreds of millions of dollars, and instead caused its bankruptcy. Never mind that the firm had never made a real profit or that its product had never actually been produced. Never mind that his valuation model would not have commanded a passing grade in a sophomore-level university finance class or that his data was financial projections made by the company in efforts to raise financing for further needed R&D. Never mind that careful inspection of these financial projections showed them to be the subject of disclaimers sufficient to keep the company from being sued if they failed to produce those numbers. Now this company was going to sue someone that had allegedly kept it from making those numbers. And they were going to use the very numbers that they had disclaimed to value their loss. They and their contingent fee attorneys demanded tens of millions to settle.

The putative expert spun the company's revenue projections, excerpted from business plans and private placement documents, through an official looking "valuation model" to yield the alleged damages. His model used six years of projections of Revenues, from which he subtracted official-looking projections for Costs of Goods Sold, Gross Margins, expenses of Marketing and Customer Support, Research and Development, and General Expenses, all yielding EBITDA projections in the range of ten to twenty million dollar per year which, when reduced by the expert witness to a present value, yielded an inferred firm value of over $100 million. Other experts were ready to testify that all the remaining problems with the product were about to be fixed and that a lucrative market existed for the product. It all looked very professional.

And note that to call their prosecution of the case a success, all the strike-suit plaintiff need accomplish is to keep the defense believing that there is a nontrivial chance that the jury will hear a damage estimate of over $100 million. Because once that happens, unless there is no straight-faced story for liability at all, juries are well-known to have a tendency to impose some kind of rough justice where they average together the $100 million that the Plaintiff's expert claims as damages with whatever the defense expert estimates as damages. In short, so long as the strike suit plaintiff can anticipate that the hugely inflated damages testimony will reach the jury, the strike suit plaintiff rationally evaluates the settlement value of the claim as a small, but nontrivial, fraction of the $100 million.

Appearances aside, this testimony was pure junk. The expert had really done nothing but spin the company's ipse dixit revenue projections, excerpted from a management-produced business plan, through a funny kind of a "valuation model" to yield the alleged damages. The projected cost reductions that he subtracted from revenues were all simple percentages of revenues which resulted in all of his spreadsheet work coming down to taking a flat percentage of projected revenues as his projections for profits. This resulted in annual profit projections in the tens of millions of dollars for this company that had never made a dollar or sold one unit of its product. He calculated the present value of these cash flows at over $100 million and this became his inferred value of the failed plaintiff firm.

Our client's client filed a pretty simple but carefully aimed objection to his testimony. We showed that the expert's model was not consistent with the Daubert/Kumho progeny and that, even if plaintiff could prove liability, the maximum amount of damages consistent with Daubert were almost surely under a million dollars. And this was still junk litigation where they would have difficulty making liability. Plaintiff dismissed within a week. The simple calculus is this: The long shot at a hundred million dollars was worth litigating over. The long shot at something under a million was not. Sophisticated Daubert motions not only control the experts in such matters, the can control the whole litigation.

 

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