September 01, 2010

Case Background

In December 2002, Gregory Cole (“Cole” or “Plaintiff”) entered into an oral distributor and dealer agreement with Homier Distributing Company, Inc. (“Homier” or “Defendant”) for Homier’s “Farm Pro” tractor line. This agreement provided for Plaintiff to establish dealerships and sell assorted Farm Pro products in return for exclusivity throughout Missouri. From 2002 through 2004, Plaintiff established over 30 dealerships and complemented its sales with online auction sales.

In September 2004, Cole and Homier memorialized their earlier oral agreement in the form of two written agreements. The agreements maintained exclusivity for certain products and could be terminated for cause with 90 days notice.

From 2005 to June 2007, Cole’s and Homier’s sales had sharply declined. Cole attributed this decline to failures on the part of Homier with respect to providing tractors and parts. Homier cited Cole’s failures to develop a dealership network and, in June 2007, sent Cole notice of its intent to terminate the Distributorship Agreement in 90 days. Cole alleged that during the 90 day period prior to the official termination, Homier violated the terms of the exclusivity provisions of the agreement.

In July 2007 Cole filed suit against Homier in Missouri State Court alleging:

  • Count I & II – Breach of Contract
  • Count III – Tortious Interference with Contracts and Business Expectancies
  • Count IV – Fraud
  • Count V – Constructive Termination of the Distributorship Agreement without 90 days notice

On March 20, 2009, the U.S. District Court, Eastern District of Missouri, Eastern Division issued its Memorandum and Order in which it granted Defendant’s Motion of Summary Judgment and dismissed Plaintiff claims with prejudice. Further, it ordered Plaintiff to exclude the testimony of its damages expert after finding the conclusions reached by that expert to be unsupported and speculative. Plaintiff appealed to the United States Court of Appeals, Eighth Circuit.

Appeals Court Review and Findings

On March 29, 2010, the United States Court of Appeals, Eighth Circuit (“USCOA”) issued its findings with respect to Plaintiff’s appeal. In its order, the USCOA addressed Cole’s claim that the district court erred in granting summary judgment and whether the district court properly excluded Cole’s proffered damages expert, essentially requiring the summary judgment ruling on several counts.

Factual Flaws

In reviewing the findings of the district court, the USCOA first discusses factual flaws in the expert’s work. Plaintiff expert’s damages relied on the premise that Cole lost the ability sell Farm Pro equipment when Defendant terminated the Distributorship Agreement. To the contrary, however, the evidence indicated that the termination letter transmitted by Defendant did “not apply to [Plaintiff’s] status as a dealer of Homier Farm Pro product lines.” The USCOA notes that these factual flaws rendered the expert’s report “of little to no assistance to the jury.”

Plaintiff had indicated that the district court should rather focus on whether the expert’s work was based on sound accounting methods requesting that the issue be decided by the jury based on weight rather than admissibility. Again, the USCOA notes that “where, as here, the expert’s analysis is unsupported by the record, exclusion of that analysis is proper, as it can offer no assistance to the jury.”

Speculation

Next, the USCOA evaluated the issue of speculation. The district had earlier noted that ““Under Missouri law, ‘[l]ost profits related to a breach preventing performance are recoverable provided the loss is the natural and proximate result of the breach, is ascertainable with reasonable certainty, is not speculative or conjectural, and was within the contemplation of the parties when the contract was made.” Structural Polymer Group, Ltd. v. Zoltek Corp., 543 F.3d 987, 997 (8th Cir. 2008) (quoting Farmer’s Electric Co-op., Inc. v. Missouri Dep’t of Corrections, 59 S.W.3d 520, 522 (Mo. 2001)).” It went on to note “The general rule under Missouri law is that anticipated profits of a commercial business are too remote and speculative to warrant recovery. They can only be recovered when they are made reasonably certain by proof of actual facts, with present data for a rational estimate of their amount.”

The expert had utilized, among other things, a projection of 25 years of lost profits and an assumption that sales will continue thereafter with an annual increase of 3%. The district court found these assumptions to be “entirely speculative and without foundation.”

In reviewing the findings of the district court, the USCOA referred to the contract between the parties noting the availability of termination with 90 days notice. It noted “there are simply too many future uncertainties for us to say that the district court abused its discretion by excluding as overly speculative a twenty-five year forecast – based solely on the age and ability to qualify for government benefits – even if the Distributorship Agreement required cause for termination.” The USCOA agreed with Plaintiff that lost profit damages not be calculated with extreme exactitude but rather with reasonable certainty. “However, in a spectrum ranging from speculation to exactitude, [Plaintiff expert’s] report is too close to the former for us to find that the district court abused its discretion.”

USCOA Findings

The district court, in its Memorandum and Order, had indicated “[Plaintiff Expert’s] report is fatally flawed because he relied on stale and incorrect data and failed to properly analyze the information provided to him.” Further, it had ruled to exclude the testimony of Plaintiff’s expert and granted summary judgment on several counts as a result. Affirming these findings, the USCOA held that “the district court did not abuse its discretion in finding that [Plaintiff’s expert] was flawed both factually and methodologically.”

Conclusion

The role of a damages expert extends beyond simply applying the information provided by a client without review, critique, validation, professional skepticism, or confirmation. It is an expert’s responsibility to review available documents which may impact the expert’s opinions or conclusions. In many cases, document review is an iterative process that also results in requests for additional documents or data before formation of expert opinion and the issuance of a written report. In this instance, the expert appears to have failed to adequately evaluate the reasonableness of the facts he was presented.

Further, an expert projecting lost profit damages must understand the risk associated with the projected lost profits. In many instances appropriately measured discount rates can be applied to compensate for the risk of receiving future cash flows, thereby mitigating the concerns of the courts related to speculation. Alternatively, in certain cases, an adequate level of factual substantiation can be provided to reasonably determine the likelihood of ongoing business relationships.

Ultimately, a financial expert should rigorously test his / her methods, review, and carefully consider the factual record of the case, and consider the variability of assumptions that contribute the calculations of both historic and future lost profits.

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