Armored Group, LLC v. Supreme Industries, Inc., et al

Filing 206

ORDER AND OPINION that Defendants' 188 Motion to Exclude Plaintiffs Expert Michael A. Fahlmans Lost Profits Damages Testimony is denied. Signed by Judge John W Sedwick on 11/15/10.(ESL)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 T h e Armored Group, LLC, a Nevada ) L im ite d Liability Company, ) ) Plaintiff, ) ) vs. ) ) ) S u p r e m e C o r p o r a t i o n , a T e x a s) c o rp o ra tio n ; and Supreme Corporation of ) T e x a s , a Texas corporation, ) ) Defendants. ) ) ) N o . CV09-414-PHX-NVW O R D E R AND OPINION [R e : Motion at Docket 188] IN THE UNITED STATES DISTRICT COURT F O R THE DISTRICT OF ARIZONA B ef o r e the Court is Defendants' Motion to Exclude Plaintiff's Expert Michael A. F a h lm a n 's Lost Profits Damages Testimony. (Doc. 188.) The Court will deny the motion. T h r o u g h o u t this order, the Court refers to Plaintiff as "Armored Group" and to D e f e n d a n ts collectively as "Supreme." The Court recognizes that some of Defendants' p re v io u s arguments have turned on separate treatment for Supreme Corporation and Supreme C o rp o ratio n of Texas, and Defendants continue to assert that distinction here. The Court's u s e of "Supreme" is for convenience only and is not intended to state a factual or legal co n clu s io n about the relationship between the two Supreme entities or either entity's re la tio n s h ip to Armored Group. I. L e g a l Standard W h e n one party challenges another's evidence, including expert evidence, Federal R u le of Evidence 104(a) requires this Court to determine, by a preponderance of proof, that 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 th e evidence is admissible. Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 59293 & n .1 0 (1993). Daubert and Kumho Tire establish that district courts must "ensure that any and a ll [expert] testimony . . . is not only relevant, but reliable." Daubert, 509 U. S. at 589; K u m h o Tire Co. v. Carmichael, 526 U.S. 137, 147 (1999). This does not mean that the party p ro f f e rin g expert testimony must "prove their case twice -- they do not have to demonstrate to the judge by a preponderance of the evidence that the assessments of their experts are c o rr e c t, they only have to demonstrate by a preponderance of evidence that their [experts'] o p in io n s are reliable." In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717, 744 (3d Cir. 1994) (em p h asis in original). F e d e ra l Rule of Evidence 702, amended in 2000 to reflect the requirements of D a u b e r t and Kumho Tire, describes the issues a court must consider when evaluating the re lia b ility of challenged expert testimony: I f scientific, technical, or other specialized knowledge will assist th e trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, e x p e rie n c e, training, or education, may testify thereto in the f o rm of an opinion or otherwise, if (1) the testimony is based u p o n sufficient facts or data, (2) the testimony is the product of re lia b le principles and methods, and (3) the witness has applied th e principles and methods reliably to the facts of the case. B u t again, "the test . . . is not the correctness of the expert's conclusions but the soundness o f his methodology." Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311, 1318 (9th Cir. 1995) (remand decision). "Vigorous cross-examination, presentation of contrary e v id e n c e , and careful instruction on the burden of proof are the traditional and appropriate m e a n s of attacking shaky but admissible evidence . . . [that otherwise] meets the standards o f Rule 702." Daubert, 509 U.S. at 596. II. B a c k gro u n d A. T h e State Department Dispute A rm o re d Group and Supreme are both in the business of specialized vehicles such as a rm o re d cars. From 1996 through the end of 2006, Armored Group was Supreme's exclusive -2- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 d is trib u to r. During those years, Supreme and Armored Group operated under a series of w ritte n contracts through which Supreme agreed to pay Armored Group a 10% commission o n armored vehicles and related products sold by Armored Group on behalf of Supreme. T h e parties' final formal contract expired at the end of 2006, but they allegedly c o n tin u e d to do "business as usual" under an oral agreement and/or a less formal written c o n tra c t through July 2007. At that point, Supreme formally terminated its relationship with A rm o re d Group. The following month, the U.S. State Department awarded an armored v e h ic le contract to Supreme which could last for as long as five years (five one-year options) a n d pay as much as $98 million, although the contract guaranteed no minimum number of s a le s . A rm o re d Group claims that it had been working since 2003 to bring Supreme and the S tate Department together. Armored Group believes that Supreme ended its relationship w ith Armored Group because Supreme knew that the State Department contract was f o r th c o m in g and Supreme wanted to avoid paying commissions on those sales. B. A r m o r e d Group's Damages Expert A rm o re d Group hired an expert, Michael Falman, to calculate its damages. (See Doc. 2 0 1 at 3 (Fahlman's expert report) (filed under seal).) Fahlman conducted what amounted to a lost profits analysis. However, because Armored Group's lost profits (i.e., its c o m m iss io n s) are a function of Supreme's sales, Fahlman's analysis focused almost entirely o n Supreme's past and predicted future performance under the State Department contract, e stim a tin g total contract earnings of about $111 million.1 At the time Fahlman submitted his re p o rt (May 2010), Supreme had apparently already earned almost $31 million under the T h e record does not disclose why Armored Group can recover commissions on e s tim a te d future sales, as opposed to actual future sales as they happen. Cf. County of La Paz v . Yakima Compost Co., Inc., 224 Ariz. 590, 610, 62, 233 P.3d 1169, 1189 (Ct. App. 2010) (" T h e nonbreaching party may . . . receive damages for the breaching party's failure to p e r f o r m one part of the contract and also attain specific performance of the contract as a w h o le ." ). Awarding future lost profits before the contract expires could give Armored Group m o r e than the benefit of its bargain. But Supreme has not objected on these grounds. -3- 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 c o n tra c t, and Fahlman estimated that Supreme would earn another $54 million before the c o n tr a c t's five-year term expired, for a total of $85 million. Fahlman also calculated a h yp o th e tic a l sixth year in which he estimated that Supreme would earn another $26 million, f o r a total of $111 million. Fahlman justified this sixth year through snippets of testimony in certain depositions, as well as through an analysis of numerous State Department contracts su p p o se d ly showing that the State Department, with reasonable frequency, extends its p roc u rem en t contracts for at least one year. F a h lm a n calculated most of his dollar figures assuming that Supreme's sales to the S ta te Department would grow 22.7% annually. Fahlman says that he chose 22.7% to err on th e conservative side. His calculations showed that the actual growth rate from the first to th e second year of Supreme's contract had been 124%, the actual growth rate from the s e c o n d to the third year was 42%, and that the State Department's overall spending on a rm o re d vehicles grew at about 27% since the Supreme contract began. Fahlman derived his 2 2 .7 % growth rate by examining the State Department's armored vehicle spending from 2 0 0 2 through 2007 (the five years preceding the Supreme contract). Fahlman, however, did n o t apply this growth rate to his hypothetical sixth contract year. Rather, he assumed that s a le s would remain flat between years five and six. F a h lm a n 's calculations accounted for the likelihood of contract termination. G ove rn m e n t procurement contracts (including Supreme's State Department contract) contain a "termination for convenience" clause, allowing the Government to end the relationship for a lm o s t any reason. Fahlman's research revealed that the Government exercises this option o n ly about 0.26% of the time. Fahlman therefore reduced its earnings calculations by 0.26%. F a h lm a n also applied a discount rate of 12.7% based on his analysis of Supreme's financial s t a b i l i t y. II I. A n a ly sis A. T h e Bottom Line Calculation S u p re m e argues that Fahlman's methodology cannot possibly be reliable because it -4- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 a rriv e s at a bottom line estimate that Supreme will earn $111 million under the State D e p a rtm e n t contract -- $13 million more than the contract's $98 million maximum value. B u t Supreme ignores how Fahlman arrived at this number. Fahlman first accounted for S u p re m e 's actual earnings to date, and then added his estimate of how much more Supreme w o u ld earn through the contract's fifth year. That amounted to approximately $85 million -- $13 million less than the contract's maximum value. Fahlman then included a separate $ 2 6 million line item for his hypothetical sixth year, bringing total earnings to $111 million. T h e re is nothing unsound about this methodology. S u p re m e argues, however, that the very possibility of a sixth year is spurious. But this i s not an issue of admissibility or reliability. Fahlman did not make an expert conclusion a b o u t whether a sixth year would happen. He instead gathered evidence which, in his mind, rea so n ab ly supported the possibility of a sixth year, and then estimated the value of that year. W h e th e r a sixth year is likely or even possible remains an issue of fact for the jury, if A rm o re d Group chooses to pursue it at trial. Given that Fahlman offered his year six e stim a te as a separate line item -- easily disregarded if a jury concludes that there would be n o year six -- the Court sees nothing inadmissible or unreliable in Fahlman's calculations. C f. County of La Paz, 224 Ariz. at 608, 54, 233 P.3d at 1187 ("[The expert] did not opine o n whether Los Angeles would renew the contract but merely calculated damages under the assu m p tio n it would do so; if the jury rejected this notion, it could adjust the number."). B. E s tim a te d Growth Rate & State Department Expectations S u p re m e next argues that Fahlman's 22.7% growth rate is based on insufficient facts o r data because Fahlman did not consider deposition testimony from State Department e m p lo ye e s about the State Department's expectations for the Supreme contract. Supreme s p e c if ic a lly points to the testimony of Ricky Motley, a State Department employee familiar w ith the Supreme contract. Motley testified that the State Department picked the $98 million c o n tra c t ceiling by roughly doubling what it thought it would spend. Motley further testified th a t he did not expect the State Department to spend more than 4050% of the total contract -5- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 v a lu e , and that he believed Supreme was on pace for no more than that. Without considering th is testimony, Supreme argues, Fahlman's opinions are not reliable. F a h lm a n admitted in his deposition that he did not read any State Department d e p o sitio n s , and his report contains nothing about Motley's expectations. Accounting for s u c h expectations -- at least as an alternative scenario -- may have been helpful, but that d o e s not mean that Fahlman's opinions are unreliable. They are simply subject to im p e a c h m e n t . Accordingly, the Court will not exclude Fahlman's testimony on these groun ds. C. A v o id e d Costs T h e parties agree that the basic formula for calculating lost profit damages is gross p ro f its minus the costs the plaintiff would have incurred to generate those profits. The latter v a ria b le is sometimes referred to as "avoided costs" because the plaintiff avoided having to s p e n d that money due to the defendant's profit-stealing conduct. Here, Supreme argues that F a h l m a n ' s calculations are unreliable because he accounted for little or no avoided costs. S u p r e m e emphasizes that Fahlman, at his deposition, admitted he had not reviewed Armored G ro u p 's balance sheets, income statements, sales figures, profit margins, customer lists, and s o forth. Supreme believes that Fahlman's conclusions cannot be reliable if he did not a c c o u n t for such information and use it to calculate avoided costs. In a typical lost profits case, Supreme would have a colorable argument. But this is n o t a typical case. A lost profits analysis usually examines the sales the plaintiff would have m a d e but for the defendant's wrongful conduct. Here, however, Armored Group argues that it already made the sale -- it just hasn't been paid for it. Armored Group therefore avoided n o costs, but rather incurred costs allegedly to bring Supreme and the State Department to g e th e r, and now Armored Group seeks compensation for its efforts. The size of Armored G ro u p 's compensation -- supposedly a 10% commission -- does not turn on Armored G ro u p 's financial status. Accordingly, the Court will not exclude Fahlman's opinions on this b a s is . -6- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 N o r will the Court exclude Fahlman's opinions for failure to consider potential c o m m is s io n s that Armored Group may be required to pay to its own sales associates. S u p r e m e alludes to such commissions (Doc. 188 at 12 n.3) but does not elaborate. C o m m is s io n s that Armored Group must pay to its own personnel are not avoided costs unless th o s e to whom commissions are owed have waived that right or agreed to accept less. The C o u rt has seen no evidence of such agreements, nor would they provide a reason to exclude F a h lm a n 's testimony. D. " R e a so n a b le Certainty" Under Arizona Law S u p r e m e claims that Fahlman's report does not create the reasonable certainty that A riz o n a requires when seeking future lost profits damages. See, e.g., Gilmore v. Cohen, 95 A riz . 34, 36, 386 P.2d 81, 82 (1963) ("The burden [is] on the plaintiffs to show the amount o f their damages with reasonable certainty. . . . The requirement of `reasonable certainty' in e sta b lish in g the amount of damages applies with added force where a loss of future profits is alleged."). This is not a Rule 702 argument, and it is otherwise premature. T h e reasonable certainty standard encompasses all of the evidence presented at trial. S e e , e.g., Felder v. Physiotherapy Assocs., 215 Ariz. 154, 165, 158 P.3d 877, 888 (Ct. App. 2 0 0 7 ) (affirming a jury's damages award based on a broad range of evidence). Nothing in th e record indicates that Fahlman will be the only trial witness to address damages. T h e re f o re , this Court cannot determine whether the evidence as a whole provides the r e a so n a b l e certainty required for a jury to award future lost profits damages. IV . O rder F o r the reasons set out above, it is therefore ORDERED that Defendants' Motion to E x c lu d e Plaintiff's Expert Michael A. Fahlman's Lost Profits Damages Testimony (Doc. 1 8 8 ) is DENIED. D A T E D this 15th day of November 2010. /S / JOHN W. SEDWICK U N IT E D STATES DISTRICT JUDGE -7-

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