Aircraft Fueling Systems, Inc. v. Southwest Airlines, Co.

Filing 268

OPINION AND ORDER by Judge Gregory K Frizzell ; granting 92 Motion to Strike; granting 96 Motion to Exclude; granting 189 Motion to Strike (Re: 30 MOTION to Strike Expert Stephen A. Jay and Expert Report ) (hbo, Dpty Clk)

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF OKLAHOMA

AIRCRAFT FUELING SYSTEMS, INC.,
Plaintiff,
v.
SOUTHWEST AIRLINES CO.,
Defendant.

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Case No. 08-CV-414-GKF-FHM

OPINION AND ORDER
Before the court are defendant Southwest Airlines Co.’s (“Southwest”) Motion to Strike
Expert and Expert Report of Stephen A. Jay [Dkt. #30], Supplement to Motion to Strike Expert
and Expert Report [Dkt. #92], Daubert Motion as to Stephen A. Jay [Dkt. #96], and Motion to
Strike Amended Report of Stephen A. Jay and Plaintiff’s Amended Rule 26 Disclosures [Dkt.
#189].
This lawsuit arises from disputes over work plaintiff Aircraft Fueling Systems, Inc.
(“AFS”) performed for Southwest pursuant to a Master Services Agreement (“MSA”). Under
the MSA, AFS provided design and construction management services for fuel storage and other
facilities at various airports. Eventually, a falling-out occurred over performance issues and
invoicing and accounting procedures. Southwest demanded reimbursement from AFS of over
$1.4 million in alleged overpayments. Ultimately, Southwest notified AFS pursuant to § 4(K) of
the MSA that it was to cease work on all projects. AFS sued Southwest, asserting claims for
breach of contract, quantum meruit and indemnity.

I. Jay’s Expert Report
On May 1, 2009, AFS produced the report of its expert, Stephen A. Jay. Jay is a
Certified Public Accountant with a B.S. and an M.S., both in accounting, from Oklahoma State
University. He was a staff accountant for Arthur Young & Company from 1972-1976 and
managing partner of Lohrey & Jay, Certified Public Accountants, from 1976-1988. Since then,
he has been the managing shareholder of Jay & Associates, P.C., which provides financial audit,
tax and consulting services to privately owned businesses and individuals. He is accredited in
business valuation and certified in financial forensics.
In the introduction to his report, Jay states:
1. I have been retained by the plaintiff Aircraft Fueling Systems, Inc. to provide expert
testimony concerning damages, losses, expenses and fees arising from the alleged
breach of contract of a Master Service Agreement dated January 1, 2001, between
Aircraft Fueling Systems, Inc. (AFS) and Southwest Airlines, Co. (Southwest).
Southwest agreed to indemnify and hold harmless AFS “from all claims, causes of
action, costs, damages, demands, expenses and fees, injuries, judgments, losses,
liabilities, penalties and suits arising from Southwest’s performance of its duties and
obligations under the MSA” as set out under Section 14(B).1
[Dkt. #30, Ex. 1, Jay Expert Report, ¶1]. Jay states that in forming his opinions, he “reviewed
various documents applicable to the operations of AFS and costs and expenses incurred in the
operation of AFS.” [Id., ¶6]. When deposed, he testified he determined the amount of damages
AFS incurred by interviewing AFS personnel and reviewing 60 documents provided to him by
AFS. Jay testified he did not verify the accuracy or validity of the amounts provided by AFS,

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Section 14(B) of the MSA provided that Southwest will defend and indemnify AFS “from all
claims, causes of actions, costs, damages, demands, expenses and fees (including, without
limitation, reasonable attorneys’ fees), injuries, judgments, losses, liabilities, penalties and suits
arising from SWA’s performance of its duties and obligations under this Agreement.” [Dkt. #30,
Ex. 2, MSA]. The court granted summary judgment against plaintiff on its claim for indemnity
on May 19, 2010 [Dkt. #40].
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and did not know how AFS calculated some of the figures on which he relied. [#96, Ex. 1, Jay
Dep. Vol I at 29:19-31:5].
Jay intends to offer the following opinions:
1.

As a result of actions by Southwest AFS reduced its labor force and incurred
significant costs. Jay states that as a result of actions by Southwest between May
2005 and September 2005, AFS had to lay off 23 employees. The company incurred
salaries, taxes and fringe benefits for the terminated employees, as well as expenses
for professional career counseling and administrative personnel and higher operating
costs in the years 2006-2008 due to higher payroll tax rates resulting from the layoffs.
The total cost of the reduction in force was $82,038.

2. The actions of Southwest regarding nonpayment of outstanding invoices
financially strapped AFS resulting in the loss of an order under an existing
government contract. AFS had a contract with the Defense Energy Support Center
(“DESC”) to provide maintenance of automated fuel handling equipment. AFS was
to receive a fifth delivery order under the existing contract at the time Southwest
stopped paying it. AFS “became illiquid and could not make timely payments to
vendors.” As a result, AFS was unable to satisfy the government regarding its
financial stability and lost the fifth delivery order for the government contract. The
loss from the DESC contract is estimated to be approximately $882,636.
3. Southwest’s nonpayment of outstanding invoices and the loss of other long term
contracts resulted in excess facilities and excessive lease expense. In 2002, AFS
entered into a five-year lease for facilities necessary to accomplish its work with
Southwest and other customers. Because of the layoffs and “loss of other contracts
that occurred after the actions of Southwest,” the operations of AFS no longer
required the amount of office space that it has leased in 2002. In June 2005, AFS still
had two years remaining on its main office lease agreement. In addition to the
expense incurred on the main lease, AFS had previously rented additional office
space at a cost of $5,763 per month. Apparently, AFS kept the additional space and
moved out of the original space. Jay stated that AFS incurred a net expense of
approximately $359,265 on its original lease. Additionally, the company had
incurred costs of approximately $51,218 for improvements to the space at the start of
the original five-year lease. The unamortized cost of the leasehold improvements
spread over five years would result in a lost cost of $20,487 over the two remaining
years of the lease. Total damages of $882,636 are claimed in connection with the
cost of excess facilities and lease expense.
4. AFS had excess infrastructure costs as a result of the nonpayment of invoices by
Southwest. AFS had one year left on a three-year commitment for a T3 line for
internet service at the time of the alleged breach by Southwest. Afterward, it only
needed a T1 line, which costs approximately half the amount of a T3 line. As a
result, the company incurred $7,055 in unnecessary expenditures for the T3 line.
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Also, the company had to spend $1,500 to remove the furniture from the office and
monthly fees of $229-$473 to store the furniture. The stored furniture was eventually
given to the storage company in exchange for rent. The loss on furniture and
equipment, including removal costs, is estimated to be $221,761.
5. “As a result of Southwest’s actions, AFS suffered adverse liquidity and incurred
significant costs as a result.” AFS claims damages for fees paid to attorneys and
accountants and late fees and penalties to the IRS, for a total cost of $422,138.
6. As a result of the actions of Southwest the company had to move its operations to
a new location. The cost of the move was $383,331. Additionally, AFS was
required to continue to employ staff, maintain a large quantity of files and documents
maintain certain items of IT equipment and incur operating costs—all for the purpose
of dealing with issues relating to the litigation with Southwest. Those costs totaled
$1,649,469.
7. AFS incurred losses for several outstanding accounts receivable in the
performance of its contract with Southwest. AFS claims $38,100.55 for account
receivables for work performed before June 1, 2005, for clients other than Southwest.
AFS appears to contend the termination of the MSA prevented it from collecting the
account receivables from unrelated clients.
Jay’s seven opinions cite eight attached schedules he prepared, which list the alleged
damages in various categories.

II. Motion to Strike and Supplemental Motion to Strike
Southwest’s first Motion to Strike [Dkt. #30], filed before its summary judgment motion
was resolved, asserted that Jay had done nothing more than accept at face value costs claimed by
AFS and add up the numbers—a task Southwest characterized as “engaging in basic arithmetic.”
Southwest argued the testimony was inadmissible under Daubert standards because the jury was
capable of performing the same arithmetic tasks.2 Further, it argued the types of damages
described in the report were consequential damages, which are precluded under § 7(A) of the
MSA.

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Southwest also attacked the opinions on the basis of reliability, arguing that Jay did little or
nothing to verify the costs claimed by AFS. That issue is more full addressed in § III below.
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AFS claimed Jay’s opinions were admissible because “Jay has specialized knowledge
that would be helpful to a jury in calculating the amount of Plaintiff’s indemnification claim,”
and “the calculations performed by Jay are based on reliable information furnished by Plaintiff.”
[Dkt. #38 at 8]. AFS vigorously asserted the basis for the damages in Jay’s report was the
indemnity provision of the MSA, §14(B), and the damages were not consequential. [Id. at 7].
During the summary judgment hearing, counsel for plaintiff stated he agreed with Southwest’s
counsel that plaintiff could not recover consequential damages, but reiterated his argument that
the damages were recoverable under the indemnity provision. [#78, Transcript at 89:11-22].
After the court granted summary judgment against AFS on, inter alia, its indemnity
claim, Southwest filed a Supplement to its Motion to Strike [Dkt. #92], asserting the court’s
summary judgment ruling rendered Jay’s report irrelevant. Southwest contended that the
damages were not recoverable as indemnity damages based on the court’s summary judgment
ruling; were not recoverable as consequential damages under Section 7(A) of the MSA; and were
not direct damages.
AFS responded by arguing that the court did not explicitly rule plaintiff could not recover
consequential damages and therefore, despite plaintiff’s previous statements to the contrary,
plaintiff is entitled to seek the losses it previously sought under the indemnity provision because
the losses were “foreseeable consequential damages.” [Dkt. #93 at 1-4]. Further, it asserted
Section 7(A)’s prohibition against consequential damages applies only to warranty duties. [Id.
Section 7, of the MSA states, in its entirety:
“WARRANTIES; DISCLAIMERS AND LIMITATION OF DAMAGES:”
A. Upon written notice received by AFS within one (1) year of the completion of a
project, AFS agrees to correct or otherwise remedy all engineering, design and
construction services rendered by AFS, its agents, employees, contractors and
subcontractors under this Agreement and materials incorporated into the Facilities
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by AFS (excluding equipment, materials and supplies manufactured by others)
found not to be of good and workmanlike quality, or not free of material defect
in workmanship or not in conformance with all applicable building codes and
standards, including those of the airport authority, and all other laws, rules,
regulations, requirements, and agreements, including the relevant provisions of
the Lease, as may be applicable thereto; provided that neither party shall be
liable to the other party for consequential damages arising from either party’s
performance under this agreement. This warranty is voided by misuse, accident
or improper operation of the Facilities, except to the extent such misuse, accident
or improper maintenance is caused by AFS, its agents, employees, contractors
or subcontractors.
B. AFS shall provide SWA with copies of all warranties issued by equipment, material
and supply manufacturers relating to any and all equipment, material and supplies
installed at the Facilities: AFS SHALL CAUSE ALL WARRANTIES TO BE
ASSIGNED TO SWA AT AFS’ SOLE COST AND EXPENSE.
[#30, Ex. 2, MSA § 7] (emphasis added).
The plain language of the provision contradicts the interpretation urged by plaintiff.
Further, Southwest has no warranty obligations under the MSA; therefore, it makes no sense to
construe the language as precluding recovery of consequential damages by either party but only
with respect to warranty claims.
Under Texas law, provisions excluding consequential damages are enforceable. See
Morgan Bldgs and Spas, Inc v. Humane Society of Southeast Tex., 249 S.W.3d 480, 491-92.
Thus, even assuming plaintiff is not estopped based on its prior counsel’s representations to the
court from arguing the damages at issue are consequential damages rather than indemnity
damages, their recovery is precluded under Section 7(A) of the MSA.
Additionally, Fed.R.Civ.P. 9(g) provides that when “an item of special damage is
claimed, it must be specifically stated.” The Tenth Circuit has explained, “Special damages
depend on particular circumstances of the case; general damages, on the other hand, are the
ordinary result of the conduct alleged.” Weyerhaeuser Co. v. Brantley, 510 F.3d 1256,1266
(10th Cir. 2007). “Consequential, or ‘special,’ damages, … are those unusual or indirect costs
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that, although caused by the defendant’s conduct in a literal sense, are beyond what one would
reasonably expect to be the ordinary consequences of a breach.” Texas A & M Research
Foundation v. Magna Transportation, Inc., 338 F.3d 394, 404 (5th Cir. 2003). “The common
law rule is that special or consequential damages are not usually recoverable in an action for
breach of contract.” Paper Magic Group, Inc. v. J.B. Hunt Transport, Inc., 318 F.3d 458, 461
(3d Cir. 2003). Plaintiff did not plead consequential damages in its Petition. [Dkt. #2-1]. Thus,
it is not entitled to seek consequential damages at trial.
Southwest’s Motion to Strike [Dkt. #30] and Supplement to Motion to Strike [Dkt. #92]
must be granted.
III. Daubert Motion
Defendant asserts Jay’s expert testimony should be excluded under Daubert because it is
neither relevant nor reliable.
Rule 702 of the Federal Rules of Evidence provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact
to understand the evidence or to determine a fact in issue, a witness qualified as
an expert by knowledge, skill, experience, training, or education, may testify
thereto in the form of an opinion or otherwise, if (1) the testimony is based upon
sufficient facts or data, (2) the testimony is the product of reliable principles and
methods, and (3) the witness has applied the principles and methods reliably to
the facts of the case.
When an objection to an expert’s testimony is raised, the court must perform Daubert
gatekeeper duties before the jury is permitted to hear the evidence. Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S. 579, 589 (1993); Kumho Tire Co., Ltd. v. Carmichael, 526 U.S.
137, 149 (1999). A trial court’s gatekeeper duty requires two separate inquiries: (1) the witness
must be qualified to offer the opinions he is espousing and (2) the proponent of the witness bears

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the burden of proving by a preponderance of the evidence that its witness’s opinions are both
relevant and reliable. Kumho Tire, 526 U.S. at 141, 152.
Regarding reliability, the Supreme Court identified four nonexclusive factors the trial
court may consider:
(1) whether the opinion at issue is susceptible to testing and has been subjected
to such testing;
(2) whether the opinion has been subjected to peer review;
(3) whether there is a known or potential rate of error associated with the
methodology used and whether there are standards controlling the
technique’s operations; and
(4) whether the theory has been accepted in the scientific community.
Daubert, 509 U.S. at 593-94. This list is not exclusive, and district courts applying Daubert
have broad discretion to consider a variety of other factors. Dodge v. Cotter Corporation, 328
F.3d 1212, 1222 (10th Cir. 2003), citing Kumho Tire Co., 526 U.S. at 150 (1999). “[T]he test of
reliability is ‘flexible,’ and Daubert’s list of specific factors neither necessarily nor exclusively
applies to all experts or in every case. Rather, the law grants a district court the same broad
latitude when it decides how to determine reliability as it enjoys in respect to its ultimate
reliability determination.” Kumho Tire, 526 U.S. at 141-42.
The same criteria that are used to assess the reliability of a scientific opinion may be used
to evaluate the reliability of non-scientific, experience-based testimony. Kumho Tire, 526 U.S. at
152. The court in Kumho stated:
In certain cases, it will be appropriate for the trial judge to ask, for example, how
often an engineering expert’s experience-based methodology has produced erroneous
results, or whether such a method is generally accepted in the relevant engineering
community. Likewise, it will at times to useful to ask even if a witness whose
expertise is based purely on experience, say a perfume tester able to distinguish
among 140 odors at a sniff, whether is preparation is of a kind that others in the
field would recognize as acceptable.
526 U.S. at 151.

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It is critical that the district court determine whether the evidence is genuinely scientific,
as distinct from being unscientific speculation offered by a genuine scientist. Dodge, 328 F.3d at
1222. “Regardless of the specific factors at issue, the purpose of the Daubert inquiry is always
to make certain that an expert, whether basing testimony upon professional studies or personal
experience, employs in the courtroom the same level of intellectual rigor that characterizes the
practice of an expert in the relevant field.” Id. at 1222-23.
The second prong of the Daubert inquiry concerns relevancy or “fit.” The trial court must
conduct inquiry into whether proposed testimony is sufficiently “relevant to the task at hand.”
Bitler v. A.O. Smith Corp., 400 F.3d 1227, 1234 (10th Cir. 2005) citing Daubert, 509 U.S. at
597. A trial court must look at the logical relationship between the evidence proffered and the
material issue that evidence is supposed to support to determine if it advances the purpose of
aiding the trier of fact. Bitler, 400 F3d. at 1234. “Even if an expert’s proffered evidence is
scientifically valid and follows appropriately reliable methodologies, it might not have sufficient
bearing on the issue at hand to warrant a determination that it has relevant ‘fit.’” Id.
a. Reliability
Plaintiff has the burden to show that Jay’s testimony is reliable, which requires that his
opinions are based upon sufficient facts or data; the product of reliable principles and methods;
and the product of a reliable application of those principles and methods to the facts of the case.
In re Williams Securities Litigation, 496 F.Supp.2d 1195, 1233 (N.D. Okla. 2007). When
evaluating the reliability of expert testimony, the court must focus on the methodology used to
reach the conclusions rather than on the actual conclusions reached by the expert. Bitler v. A.O.
Smith Corp., 400 F.3d 1227, 1233 (10th Cir. 2004), cert. denied sub nom White-Rodgers Co. v.

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Bitler, 546 U.S. 925 (2005). This includes assessing whether the expert has adequately
accounted for alternative explanations or causes. In re Williams, 496 F.Supp.2d at 1234-35.
Defendant argues Jay’s methodology was deficient because, inter alia, he relied on
summary documents of alleged damages provided by AFS without reviewing underlying
supporting documentation. The court agrees Jay’s methodology renders his opinions unreliable.
b. Relevance
The touchstone of admissibility of expert testimony is its helpfulness to the trier of fact.
Hayes v. Wal-Mart Stores, Inc., 249 F.Supp.2d 1249, 1251 (E.D. Okla. 2003) citing Wilson v.
Muckala, 303 F.3d 1207, 1219 (10th Cir. 2002). Jay’s opinion explicitly relied on the indemnity
provision as the basis for the claimed damages. The court granted summary judgment against
AFS on its indemnity claim. Therefore, Jay’s opinion is not relevant.
Southwest’s Daubert motion [Dkt. #96] must be granted because Jay’s opinion does not
meet Daubert requirements for reliability or relevance.
IV. Motion to Strike Amended Report of Jay and AFS’s Amended Rule 26 Disclosures
Jay’s original report was served on defendant on May 1, 2009. The deadline for plaintiff
to identify its experts and provide reports was January 31, 2011. [Dkt. #77]. Southwest deposed
Jay on May 5, 2011. On September 8, 2011, plaintiff served on defendant an Amended Report
of Stephen A. Jay and “amended” Rule 26 disclosures. In the amended report, Jay made several
corrections to the original report. The corrections relate to errors in the original report which
were exposed during Jay’s deposition and which he admitted needed correction. Additionally,
he deleted Paragraph 1 of his original report, which had stated that Southwest had agreed to
indemnify AFS for losses under Section 14(B) of the contract. Finally, Jay added a new opinion
and schedule (Opinion 8 and Schedule 9) summarizing plaintiff’s claim for unpaid invoices

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“based on an analysis prepared in 2008…to reconcile outstanding claims between AFS and
Southwest Airlines.” As set forth in Schedule 9, Jay opines Southwest owes AFS $8,788.193.33.
Two items have been added to the list of documents Jay reviewed in preparing his report: a copy
of the SWA Audit 20060111 and copies of invoices to Southwest from AFS. [Dkt. #189, Ex. A
at 32].
Southwest objects to the new Opinion 8 both because the addition is untimely and
unreliable.3
Rule 26(a)(2) requires that the expert report contain a “complete statement of all opinions
the witness will express and the basis and reasons for them.” A party’s failure to disclose the
identity of an expert witness or provide a timely expert report requires the court to automatically
exclude expert testimony unless the violation of Rule 26(a)(2) was justified or was harmless
under the circumstances. Fed.R.Civ.P. 37(c)(1); Jacobsen v. Deseret Book Co., 287 F.3d 936,
951-52. (10th Cir. 2002). A court may exclude specific opinions or bases for the expert’s
opinions that were not fairly disclosed in the expert’s report. Keach v. United States Trust Co.,
419 F.3d 626, 641 (7th Cir. 2005).
Opinion 8 regarding unpaid invoices and contractual late fees was not included in Jay’s
original report and was not disclosed until more than seven months after the expert report
deadline and four months after Jay’s May 5, 2011, deposition.
Rule 37(c)(1) states:
Failure to Disclose or Supplement. If a party fails to provide information or identify a
witness as required by Rule 26(a) or (3), the party is not allowed to use that information
or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure
was substantially justified or is harmless. In addition to or instead of this sanction, the
court, on motion and after giving an opportunity to be heard;
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Southwest also reiterates its objection to Jay’s original seven opinions, but states that if those
opinions are admitted, it does not oppose the corrections made in the Amended Report.
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(A) may order payment of the reasonable expenses, including attorney’s fees, caused by
the failure;
(B) may inform the jury of the party’s failure; and
(C) may impose other appropriate sanctions, including any of the orders listed in Rule
37(b)(2)(A)(i)-(vi).
In determining whether evidence should be excluded under Rule 37(c)(1), courts consider
four factors: (1) the prejudice or surprise to the party against whom the testimony is offered; (2)
the ability of the party to cure the prejudice; (3) the extent to which introducing such testimony
would disrupt the trial; and (4) the moving party’s bad faith or willfulness. Woodworker’s
Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999).
The late addition of Opinion 8 is clearly prejudicial to Southwest, which has already
invested significant time and resources deposing Jay and AFS witnesses, engaging in motion
practice regarding his timely-disclosed opinions, and have a rebuttal report prepared by an
expert. Southwest has had no opportunity to depose Jay about the new opinion and its expert,
Robert Lang, has had no opportunity to address the new opinion in his rebuttal report.
Moreover, Southwest was not able to include the new opinion in its motion to strike. Southwest
also contends the addition of claims for “late fees” on invoices is entirely new. The prejudice
cannot be cured unless Southwest is given an opportunity to re-depose Jay and possibly other
AFS witnesses and engage in additional motion practice. This would disrupt the trial, which is
set for December 19. Thus, the first three factors weigh in favor of striking the new opinion.
Regarding the fourth factor, a “willful failure” is defined as “any intentional failure as
distinguished from involuntary noncompliance. No wrongful intent need be shown.” Hudgins v.
Vermeer Mfg. Co., 240 F.R.D. 682, 685 (E.D. Okla. 2007) citing In re Standard Metals, 817 F.2d
625, 628-29 (10th Cir. 1987). Plaintiff’s conduct clearly meets this standard. Jay’s new opinion

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is not based on any newly discovered evidence, and plaintiff has offered no excuses for its failure
to comply with Rule 26(a)(2).
AFS has failed to carry its burden of showing the violation of Rule 26(a)(2) is either
justified or harmless. Therefore, Southwest’s Motion to Strike the Amended Report [Dkt. #189]
must be granted. This does not, however, preclude AFS fact witnesses from testifying about the
nature and amount of claimed direct damages.
V. Conclusion
For the reasons set forth above, Southwest’s Motion to Strike Expert and Expert Report
of Stephen A. Jay [Dkt. #30], Supplement to Motion to Strike Expert and Expert Report [Dkt.
#92], Daubert Motion [Dkt. #96] and Motion to Strike Amended Report of Jay and Plaintiff’s
Amended Rule 26 Disclosures [Dkt. #189] are granted.
ENTERED this 8th day of December, 2011.

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