Manpower, Inc. (“Manpower”) sued the Insurance Company of the State of Pennsylvania (“ISOP”) regarding an insurance coverage dispute over claims made by Manpower against ISOP for “business interruption losses and the losses of its business personal property and improvements and betterments.”1 The lawsuit arose over a June 15, 2006, partial building collapse that “rendered wholly inaccessible” the offices of Manpower’s subsidiary, Right Management, “because the building could no longer be occupied by order of the Parisian Department of Public Safety”2 (the “Parisian Order”). Notably, Right Management’s office space and furnishings were not damaged, but the collapse made it impossible to access the office space and interior furnishings.3 In time, Right Management relocated, but due to the continued Parisian Order regulations, it was not able to gain access to either its restricted office space or its office furniture inside that office space.4 The building collapse and Right Management’s inability to access the office space or its furnishings (due to the Parisian Order) caused Right Management to lose income and to incur “expenses from the interruption of its business operations.”5
The inaccessible office was covered by two different policies: a “difference in conditions policy—the ‘master’ policy—issued by ISOP and covering Manpower’s operations worldwide”6 and a policy carried by Right Management issued by ISOP’s French affiliate, AIG-Europe (the “local policy”).7 According to the district court, “the local policy provides the first line of coverage, and the master policy fills in the gaps by providing excess coverage over the local policy’s limits, or by covering specific losses that are not insured under the local policy.”8 After the collapse, Right Management recovered $250,000 from the local policy “pursuant to a provision covering losses caused by a lack of access by order of a civil authority”9 and $250,000 from the master policy under that policy’s lack-of-access provision.10 Manpower, however, also sought up to an additional $12 million from ISPO under the master policy for claimed “business interruption losses and the loss of—not damage to—the business personal property located in the office space Right Management could no longer access, as well as the improvements and betterments it had made to that space and had to replicate in its new offices.”11 ISOP denied the claim under the master policy for these losses, and Manpower filed this lawsuit in the district court.12
The Motion for Summary Judgment
On its motion for summary judgment, ISOP argued that Manpower was not entitled to reimbursement for the claimed expenses under the master policy because the losses “were not caused by the building collapse, but only by the [the Parisian Order] closing […] the building.”13 Manpower argued that it was entitled to reimbursement for the expenses “because its interest was not limited to the portion of the building reserved for its exclusive use, but also included common areas, elevators and staircases, safety systems, and the building’s foundation and support structure, which were necessary to its use of the leased space.”14 Any damage to the structure Manpower argued, that made it impossible for Manpower to operate out of that location “triggered the coverage under the master policy’s general business interruption provision.”15
In its ruling on the cross motions for summary judgment the district court ruled that “the collapse rendered the entire [building] unstable, at least for a period of eight to ten weeks following the collapse, during which temporary measures were taken to ensure the building’s stability.”16 Specifically the district court stated, “it was the collapse itself that prevented Right [Management] from using its offices, and the [Parisian Order] merely confirmed that the collapse rendered the entire building unstable.”17 As such, the district court ruled that Manpower was “entitled to reimbursement for any business interruption losses it sustained between the collapse and the time the necessary repairs could have been, or were completed, up to $15 million.”18
ISOP next filed a motion in limine after expert discovery ended to exclude Manpower’s damages expert’s opinion regarding Manpower’s business interruption loss claim arguing that his outcome “was not the product of a reliable methodology.”19 The master policy contained a provision that detailed the methodology for determining lost profits in the event of a business interruption (lost revenues minus non-continuing expenses).20 The district court ruled that the expert properly followed the prescribed methodology and that his “calculations were, therefore, straightforward.”21 However, the district court went further and stated that the question of whether those straightforward calculations were reliable “turns on whether [the expert] used reliable methods when selecting the numbers used in his calculations—specifically, projected total revenues and projected total expenses.”22 At issue, according to the district court, was Manpower’s expert’s choice of a 7.76% growth rate in making his calculations (reflecting Right Management’s income growth for a five-month period in 2006).23 ISOP argued this growth rate projection was improper because it did not accurately reflect Right Management’s “historical performance, which included a negative average annual growth rate of 4.79% during the period 2003 to 2009, and a mere 3.8% growth rate in the period of January 2005 to May 2006.”24 At his deposition, Manpower’s expert explained that he was aware of Right Management’s performance from 2003 on, but that he “used a shorter period from which to extrapolate the growth rate because according to Right [Management’s] managers, the recent acquisition of Right [Management] by Manpower and the enactment of new policies and installation of new managers had turned the company around by the end of 2005.”25
The district court did not take issue with Manpower’s expert’s use of a “basic growth-rate extrapolation…”26 but instead rejected Manpower’s expert’s choice of the specific growth rate.27 Moreover, the district court took issue with Manpower’s expert relying on his interviews with Right Management’s management because, according to the district court “[Manpower’s expert] is not an expert on business management, and thus [Manpower’s expert’s] conversations with Right [Management’s] managers cannot be considered a reliable basis for a revenue forecast.”28 Finally, the district court rejected Manpower’s expert’s choice “to treat Right [Management] as essentially a new business, the valuation of which requires examination of other indicators to make up for a lack of a track record.”29 As such, the district court ruled in favor of ISOP’s motion in limine and excluded Manpower’s expert from testifying.30
Manpower filed a motion to reconsider with the district court arguing that Manpower’s expert had performed a more complete analysis than the district court appreciated including “calculating various growth rates” and that the district court “misapplied Rule 702 and Daubert by taking out of the jury’s hands the questions of whether [Manpower’s expert’s] reasonably relied on the testimony of Right Management executives and whether a growth rate derived from a five-month period was reasonable.”31 Manpower also submitted a supplemental report from its expert. This supplemental report consisted of an affidavit in which Manpower’s expert:
further explained parts of his expert report. For example, he attested that he did more than simply select the five-month growth from one year to the next, citing a table in his report in which he sampled longer and shorter growth periods. [Manpower’s expert] said he believed that the growth rate yielded by the five-month comparison was more reliable and conservative that those derived from 12-and 14-month periods (20.1% and 13.67%, respectively).32
The district court again held that Manpower’s expert’s “conversation with Right [Management’s] managers was not a reliable basis for his selection of a growth rate,” and that the field of forensic accounting requires an expert to do more than develop a list of possible growth rates and choosing a growth rate from that list.33 According to the district court, Manpower’s expert “should have cited ‘literature from the field of forensic accounting’ because ‘it’s what’s normal in the field of forensic accounting that matters.”34 As the district court saw it, Manpower’s expert was doing little more than relying “merely on his intuition rather than established principles.”35 After this ruling, on September 6, 2011, the district court ruled in favor of ISOP’s subsequent motion for summary judgment because “without [Manpower’s expert’s] testimony, Manpower lacked any evidence to support the existence or the amount of a business interruption loss.”36
Manpower appealed to the Seventh Circuit Court of Appeals arguing that the district court abused its discretion in not allowing Manpower’s expert to testify and the Seventh Circuit agreed: “In this case, we conclude that the concerns that prompted the district court to exclude Sullivan’s opinion implicated not the reliability of Sullivan’s methodology but the conclusions that it generated. Sullivan ‘utilized the methods of the relevant discipline.”37 In its ruling, the Seventh Circuit expanded on its prior rulings regarding a trial court’s discretion when it comes not to reviewing an expert’s methodology, but to reviewing the basic data an expert plugs into an established (or, in this case, contractually prescribed) methodology.39 The Seventh Circuit ruled that the district court’s assessment:
of the reliability of the methodology ought to have ceased (or proceeded to the second variable in the business-loss equation.) Instead, the district court drilled down to a third level in order to assess the quality of the data inputs Sullivan selected in employing the growth rate extrapolation methodology. What the district court took issue with was not Sullivan’s growth-rate extrapolation methodology, but rather his selection of certain data from which to extrapolate. Indeed, the district court effectively acknowledged that its problem was not with Sullivan’s methodology but with his data selection when it stated that ‘had Sullivan not chosen such a short base period for calculating lost revenues, I might have found his analysis reliable.’ The district court thought Sullivan should have selected different data, covering a longer period, as the base for his projection, but the selection of data inputs to employ in a model is a question separate from the reliability of the methodology reflected in the model itself.39
The Seventh Circuit’s ruling is consistent with its own previous rulings and is instructive to both lawyers and damages experts.
In another recent case, Stollings v. Ryobi Technologies, 725 F.3d 753 (7th Cir. 2013), the Seventh Circuit held that even though a qualified expert used a “rough estimate,”40 excluding those inputs was an abuse of discretion.41 In Stollings, the district court found that the expert used a valid methodology “but found the expert’s opinion unreliable only because he concluded that one of the key data inputs he used was not sufficiently reliable.”42 The Seventh Circuit reversed because “[t]he judge should have let the jury determine how the uncertainty about [the accuracy of the data input] affected the weight of [the expert’s] testimony.”43 Moreover, in Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000), the Seventh Circuit held that: “The district court usurps the role of the jury, and therefore abuses its discretion, if it unduly scrutinizes the quality of the expert’s data and conclusions rather that the reliability of the methodology the expert employed.”44 According to the Seventh Circuit:
Reliability, however, is primarily a question of the validity of the methodology employed by an expert, not the quality of the data used in applying the methodology or the conclusion produced. The soundness of the factual underpinnings of the expert’s analysis and the correctness of the expert’s conclusions based on that analysis are factual matters to be determined by the trier of fact, or, where appropriate, on summary judgment.45
Litigators and experts should be aware of the distinction made here by the Seventh Circuit between a Daubert challenge to methodology and an opposing party’s challenge to data inputted into an accepted (or, again, in this case contractually mandated) methodology for determining the alleged damages (or lack thereof) in a pending litigation. In Manpower the Court suggests a damages expert should be granted some leeway (subject, of course, to the finder of facts determination) on the inputs an expert enters into his or her calculations (so long, of course, as the calculations themselves survive the Daubert analysis). This acceptable range is, of course, limited by other Federal Rules of Evidence intended to restrict evidence that is irrelevant, prejudicial, etc. As such, the Manpower decision (and the preceding Seventh Circuit decisions) reveals important considerations for lawyers facing Daubert challenges against their damages expert’s choice of inputs into what may be an otherwise acceptable methodology or calculation.
1 Manpower, Inc., v. Insurance Company of the State of Pennsylvania, 732 F.3d 796, 799
(7th Cir., 2013).
2 Manpower, 732 F.3d 796, 799.
11 Id. at 800.
18 Id. at 801.
19 Id. (emphasis added).
24 Id. at 802.
31 Id. at 802-803.
32 Id. at 803.
38 Id. at 805.
39 Id. at 807.
40 Id. (citing Stollings v. Ryobi Technologies, 725 F.3d 753, 767 (7th Cir. 2013)) see also Stollings at 765 (“Rule 702’s requirement that the district judge determine that the expert used reliable methods does not ordinarily extend to the reliability of the conclusions those methods produce—that is, whether the conclusions are unimpeachable.”).
41 According to the Seventh Circuit: “Admittedly, this is not always an easy line to draw. As the Supreme Court observed in General Electric Co. v. Joiner, 522 U.S. 136, 146 (1997), ‘conclusions and methodology are not entirely distinct from one another. Trained experts commonly extrapolate from existing data.’ The critical inquiry is whether there is a connection between the date employed and the opinion offered; it is the opinion connected to existing data ‘only by the ipse dixit of the expert,’ id., that is properly excluded under Rule 702.”
41 Manpower, 732 F.3d 796, 807.
42 Id. at 807.
43 Id. at 807; see also Tuf Racing Products v. Am. Suzuki Motor Corp., 223 F.3d 585, 591 (7th Cir. 2000).
44 Manpower, 732 F.3d 796, 806 citing Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000).
45 Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir. 2000).