Black Hills Truck & Trailer, Inc. v. MAC Trailer Manufacturing, Inc.
ORDER denying 84 Motion to Exclude; denying 88 Motion for Joinder. Signed by U.S. District Judge Karen E. Schreier on 7/10/17. (DJP)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
BLACK HILLS TRUCK & TRAILER, INC.,
MAC TRAILER MANUFACTURING, INC.,
and SIOUXLAND TRAILER SALES,
Case No. 13-cv-4113 (KES)
ORDER DENYING DEFENDANTS’
JOINT MOTION TO EXCLUDE
Defendant MAC Trailer Manufacturing, Inc. moves to exclude the expert
testimony of Wayne R. Brown, A.S.A., M.B.A. Defendant Siouxland Trailer
Sales, Inc. joins the motion of MAC. Plaintiff, Black Hills Truck & Trailer, a
wholly-owned subsidiary of North American Truck & Trailer, Inc., opposes the
motion. For the following reasons, Siouxland’s motion for joinder is granted,
and MAC and Siouxland’s motion to exclude expert testimony is denied.
Black Hills filed a lawsuit against MAC and Siouxland alleging multiple
causes of action, including breach of contract, breach of good faith and fair
dealing, and tortious interference with a business relationship. Docket 46.
MAC had entered into a written distributor agreement with Black Hills on
September 26, 2012, granting Black Hills the right to franchise and distribute
MAC product throughout western South Dakota and parts of Nebraska. Docket
67-6. A new contract term would renew yearly on January 1, unless either
party modified or non-renewed the current agreement. Id.
On or around June 3, 2013, MAC sent proposed distributor agreement
modifications to Black Hills’ Vice President, Mike Rush. Docket 67-10. On June
24, 2013, MAC sent Black Hills an email stating that MAC would not accept
any orders placed by Black Hills until the new agreement was signed. Docket
67-11. On July 2, 2013, Black Hills sent its own proposed modifications to
MAC, including the right to sell all MAC products instead of the two trailer
types (dumps and flatbeds) authorized under the existing agreement. Docket
67-14 at 5 (emphasis added). This letter also stated Black Hills’ intention to file
a civil lawsuit in South Dakota against MAC if the new terms were not met. Id.
Black Hills alleges that the June 24, 2013 email is a wrongful
termination of the distributor agreement, and that Black Hills incurred
damages it otherwise would not have but for MAC’s non-renewal of the
agreement. Docket 100 at 2. It is in dispute whether the agreement was
terminated within the first nine-months of contract, or non-renewed after
fifteen months on December 31, 2013. Id. Regardless, Black Hills states it only
sold MAC trailers for nine months. Id. at 2 n.2. Black Hills retained Wayne R.
Brown to provide expert testimony on his assessment of Black Hills’ lost profits
and provided MAC and Siouxland with Brown’s supplemental expert report.
Docket 86-3. In reaching his ultimate conclusion, Brown considered multiple
sources of data and information, and included that which he assessed to be
relevant. Docket 100 at 2.
The admissibility of expert testimony is governed by Federal Rule of
Evidence 702, which requires expert testimony to be “scientific, technical, or
other specialized knowledge” that will clarify the trier of fact’s understanding of
the evidence or determination of a fact in issue. See, e.g., Tamara Star Comes
Out v. Ahsan, No. Civ. 05-5075, 2008 WL 2675106, at *2 (D.S.D. Apr. 22,
2008). Under Rule 702, an expert may testify if (in relevant part): “the
testimony is based on sufficient facts or data[,] . . . the product of reliable
principles and methods[,]” and if “the expert has reliably applied the principles
and methods to the facts of the case.” Fed. R. Evid. 702.
The decision to permit or exclude expert testimony lies within the
discretion of the trial court, and is the standard set by the United States
Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579
(1993). Under Daubert, trial judges are given the “responsibility of acting as
gatekeepers to exclude unreliable expert testimony[.]” Fed. R. Evid. 702,
Comment to 2000 Amendments. By acting in this “gatekeeper” role, the court
must find that all submitted expert testimony be properly grounded, wellreasoned, and not mere speculation before it can be admitted to trial. See
Daubert, 509 U.S. at 592 (finding that an expert’s knowledge must be more
than mere “subjective belief or unsupported speculation”). The Court stated
that the party offering expert testimony must establish that the opinion is
“supported by appropriate validation … based on what is known,” but still
acknowledged that it is “unreasonable” to require the opinion be “known to a
certainty.” Id. at 590.
Despite the court’s wide discretion in determining an expert’s
admissibility under Daubert—in the case of factual ambiguity—the expert is
less likely to be excluded if the question of reliability would be better
challenged on cross-examination. See, e.g., id. at 595 (finding that “vigorous
cross-examination [and] presentation of contrary evidence . . . are the
traditional and appropriate means of attacking shaky but admissible
evidence.”). In other words, a challenge under Daubert does not often result in
the exclusion of experts because of factual flaws made in their opinion when
their testimony would be probative to the jury and the issues in dispute can
otherwise and expectedly be uncovered during trial. Id.
For the following reasons, the court finds that Black Hills has fulfilled its
burden to proffer evidence regarding the admissibility of Brown’s expert
testimony through evidence that is sufficient to meet the standard set by Rule
702 and Daubert, and that MAC and Siouxland’s objections would be better
addressed on cross-examination.
Before moving forward, it is important and efficient to broadly address a
few points that MAC and Siouxland have made regarding Brown. First, neither
defendant objects to Brown’s credentials or qualifications as an Accredited
Senior Appraiser. Docket 85 at 5. Second, MAC and Siouxland’s main
objections to Brown’s reliability as an expert stem from the allegations that his
opinions “drastically overstated” Black Hills’ lost profits by using numerically
inaccurate data. Id. at 12.
While the defendants urge the court to exclude Brown’s testimony due to
the alleged inaccuracy of the numbers and data used in calculating damages,
the correctness of these figures is a question of fact, not law. Further, Brown
specifically stated reasons for his estimations, so defense can challenge these
deliberate choices on cross-examination. See Docket 93-5 at 10 (where Brown
explained his ‘overestimations’ by stating that “[Black Hills’] historical sales of
MAC trailers underrepresent the strong traction [Black Hills] had achieved with
MAC customers.”) Most challenges made by MAC and Siouxland intertwine
Brown’s methodology with the data applied to his method, so this order will
attempt, with all due diligence, to separate the two so as only to comment on
the reliability of the formula and methodology used, and not the conclusions
generated by the factual data. See Daubert, 509 U.S. at 595 (finding that the
court must focus only on the “principles and methodology” of the expert’s
testimony, “not on the conclusions that they generate”).
Relevant sources of this data must, however, be addressed by the court
to some extent, but ultimately it is for the jury to determine whether the
numbers Brown used are correct. It is this court’s duty only to evaluate
whether Black Hills has laid the foundation for admissibility, which will be
determined through the examination of Brown’s methodology and his
testimony’s ability to assist the trier of fact in understanding the complex
nature of future profit-loss estimation.
Brown’s Proposed Expert Testimony is Based on Proper
Methodology Commonly Seen in Calculating Lost-Profits.
MAC and Siouxland argue that Brown’s testimony should be excluded
because his opinions are not sufficiently based in factual support to meet the
high burden of admissibility. See, e.g., Docket 85; see also Mostly Media, Inc. v.
U.S. West Commc’ns, 186 F.3d 864, 867 (8th Cir. 1999) (finding the plaintiff’s
burden of proof “in a lost-profits case is admittedly heavy”). There are three
broad arguments made by MAC and Siouxland under their main contention
surrounding Brown’s use of insufficient facts and unreliable data. Docket 85 at
5. MAC and Siouxland challenge 1) “Brown’s application of the wrong measure
of damages,” 2) “his blind trust in the representations made” by Black Hills,
and 3) “his total disregard of certain facts” unfavorable to Black Hills’ lost
profits assessment. Id. All three of these arguments make up “an attack on the
methodologies Brown employed.” Id.
Brown projected lost profits by properly calculating and applying
damages through a methodical procedure accepted by both the
legal and industrial fields.
MAC and Siouxland’s first attack is on “Brown’s application of the wrong
measure of damages[.]” Defendants begin by contending that Black Hills’
burden for proffering lost profits is higher than usual based on the limited time
Black Hills was a MAC dealer. Id. at 6 (stating that Black Hills’ “MAC-related
business line was new.”). There is, however, an important distinction between a
business being considered new and a new business line. The Eighth Circuit
recognizes an increased standard for calculating reliable lost-profits when the
former has recently been established, but only imposes this heavy burden after
examining the distinctive facts of each case. See, e.g., Tipton v. Mill Creek
Gravel, Inc., 373 F.3d 913, 918 (8th Cir. 2004) (stating that the plaintiff’s
burden in a lost profits case is even greater when a business has only existed
for a short amount of time, and that the exorbitant amount of assessed lost
profits was merely “wishful thinking”); see also Tyus v. Urban Search Mgmt.,
102 F.3d 256 (7th Cir. 1996) (finding that not all specific factors presented in
each case can apply to every type of expert testimony).
Here, given the specific circumstances of this case, the court does not
consider Black Hills to be “new” to the business of selling and servicing trailers,
even though Black Hills had just recently acquired the distributor agreement
with MAC. Black Hills is well-established in the market, and thus significantly
more stable in both operation and income than it would be if the agreement
with MAC had been its first or only distributorship. See, e.g., Docket 88-1 at 17
(“[Black Hills] know[s] what the business is, they know what the market is.”).
In Diesel Machinery, Inc. v. B.R. Lee Industries, Inc., 418 F.3d 820, 837
(8th Cir. 2005), the Eighth Circuit Court of Appeals found that the use of a tenyear projection period to determine lost profits incurred due to the unlawful
termination of an exclusive dealership agreement, after a limited eight-month
agreement period, was proper. Thus, Brown’s opinion that “ten years is a very
acceptable time period” is not inappropriate.
MAC and Siouxland also challenge the data employed by Brown in
“forecast[ing]” his total calculation of Black Hills’ lost profits over this ten-year
period. Docket 85 at 7. Detailed in MAC’s brief are numerous objections made
to factually contradict the specific data amounts outlined in Brown’s report.
See Docket 85; see also Docket 113. These factual objections will be better
addressed during cross-examination of Brown, and left to the jury to allocate
credibility and weight.
MAC contends that Brown’s estimate of the number of future trailer sales
is “pure speculation” and that “any opinions” made in reliance on these figures
are therefore inadmissible. Docket 85 at 10; see, e.g., Marmo v. Tyson Fresh
Meats, Inc., 457 F.3d 748, 757 (8th Cir. 2006) (“Expert testimony is
inadmissible if it is speculative, unsupported by sufficient facts, or contrary to
the facts of the case.”). “When the analytical gap between the data and
proffered opinion is too great, the opinion must be excluded.” Marmo, 457 F.3d
Here, MAC’s objection is not with the formula Brown used to calculate
lost profits, but rather the original data applied to the formula. After careful
consideration of the data used by Brown to calculate lost profits, the court
finds there is some support in the record for the data he applied to the formula,
and the “analytical gap” between the data and Brown’s ultimate conclusion is
not too great. Because it is impossible to create a projected forecast without
some degree of speculation, Daubert, 509 U.S. at 590, any factual objections
are better left to the jury to determine.
Brown correctly relied on the assertions made by Black Hills that
had first-hand knowledge and experience regarding Black Hills’
cost structure and earning potential.
Second, MAC and Siouxland argue that these estimations were formed
purely on the basis of assertions made by Black Hills, without Brown
independently investigating further to validate the projection representations.
Docket 85 at 6 (contending that Brown collected data through “blindly
accept[ing]” assertions made by Black Hills’ officials and employees). Black
Hills relies upon an Eighth Circuit case that exhibits analogous facts to the
current dispute, including wrongful termination, an award of lost profits
estimated over a ten-year period, and defendant’s contention that plaintiff “was
‘seriously overstat[ing]’ its damages and prospects of success.” Diesel, 418 F.3d
at 829. Black Hills’ reliance centers on the Eighth Circuit’s affirmation that the
business owner could testify to the company’s “prospects of success” due to his
extensive knowledge within the industry. Docket 100 at 9 (“[T]he business
owner’s expectations and anticipations of the terminated product line are
essential to a thorough and reliable analysis.”).
Siouxland argues in its reply that the “testimony at issue” in Diesel “was
that of the plaintiff himself, not an expert.” Docket 114 at 1. The important
point of the Diesel opinion is the Eighth Circuit’s conclusion that the business
owner had the requisite knowledge to estimate the plaintiff company’s earning
potential and consequent lost profits. Diesel, 418 F.3d at 837 (affirming the
owner’s “experience in the business provided the foundation for all the specifics
to which he testified”).
It can further be reasoned that, if a court found a business owner’s
experience to be reliable enough to withstand the level of scrutiny in trial,
Brown could reasonably rely on Black Hills’ assertions of its own cost structure
and earning potential. Docket 109-1 at 2 (“In order to determine the amount of
avoided costs, the [expert] needs to understand the plaintiff’s cost structure.”).
Here, the more specific question is whether Brown solely relied upon
Black Hills, disregarding all other factors relevant in calculating his estimate.
Docket 100 at 9 (“Brown cross-referenced [Black Hills’] information with
external or third-party sources whenever such sources were available.”). There
is no dispute that Brown relied upon Black Hills to some extent in establishing
projections that he could apply to his formula for measuring damages, Docket
113 at 6 (“[I]t cannot be disputed that [Black Hills] did not provide Brown with
any actual projections.”), but it is reasonable to assume that there are very few
external sources available regarding private business sales forecasts and
expectations. See, e.g., Docket 109-1 at 2 (finding a significant variance
regarding “the degree of detail contained in the plaintiff’s accounting records
regarding costs” and that “different degrees of specificity may be required in
estimating the extent of avoided costs”).
Rule 702 asks whether the expert is relying on a sufficient basis of
information when reaching an opinion, and Black Hills, like the business
owner in Diesel, certainly is in the best position to provide Brown with the
information he needs to start his analysis. Fed. R. Evid. 702. The court finds
that Brown properly relied upon the assertions and expectations made by
Black Hills when creating his lost profits projection because Black Hills officials
had sufficient and reliable first-hand knowledge of the company, and the
information was not reasonably available through third-party or external
sources. The mere disagreement regarding the reliability and accuracy of the
numbers provided is a matter for the jury to determine. Any and all challenges
the defense may have to these numbers should be properly brought during
cross-examination; it is this court’s conclusion that the source of the
information—Black Hills—was reasonably relied upon.
Brown properly followed a formula similar to that accepted by
courts in Diesel, Buono Sales, and Groseth, Inc. when reaching
his total calculation of lost profits.
Finally, MAC and Siouxland’s last challenge to Brown’s methodology is
his alleged purposeful data omissions that result in Brown reaching an
inaccurate calculation of lost profits, thus making his methodology and
formula “utterly unreliable[.]” Docket 85 at 11. In Concord Boat Corp. v.
Brunswick Corp., 207 F.3d 1039, 1056 (8th Cir. 2000), the court found a
proper objection to the admissibility where the expert’s damage assessment
was “not grounded in . . . economic reality” and “ignored inconvenient
MAC reasons that the calculated lost profits reflect Black Hills’ gross
profits rather than net profits because Brown only included the cost of the
trailers and employee sales commissions as mitigating variable expenses. In
Groseth International, Inc. v. Tenneco Inc., 440 N.W.2d 276 (S.D. 1989), the
South Dakota Supreme Court found that damages are properly found when the
“amount of net profits . . . plus the amount of fixed future overhead expenses”
are measured, rev’d on other grounds, Tibke v. McDougall, 479 N.W.2d 898
(S.D. 1992). In reaching this conclusion, the South Dakota Supreme Court
relied almost exclusively on the Third Circuit’s approach regarding lost profit
measures in Buono Sales, Inc. v. Chrysler Motors Corp., 449 F.2d 715 (3d Cir.
1971). Groseth, 440 N.W.2d at 278 (concurring “with the parties that the
proper measure of damages for loss of profits is set forth in Buono Sales . . . .”).
The facts in Buono Sales are analogous to those in the current case,
namely a breach of contract claim arising between a manufacturer and a
dealer. Buono Sales, 449 F.2d at 716. The expert in Buono Sales, a certified
public accountant, arrived at his estimate by subtracting “from gross profits
certain variable expenses which he believed to be directly related” to Chrysler’s
product at the center of the breach. Id. at 718. The court found this to be
proper given the facts of the case. Id. (finding that sales compensation and
commissions were included in variable expenses and “deemed to be directly
allocable” to the sale of the product). Additionally, the court held that “where
the plaintiff’s overhead or fixed expenses are not affected by the defendant’s
breach, no deduction should be made in calculating the profits which the
plaintiff would have made had it not been for the breach.” Id. at 719-20.
Here, MAC argues that, under Groseth, Brown’s formula should be
rejected because he only included the cost of the trailers and employee sale
commissions as mitigating variable expenses. Docket 85 at 11-12. This court
finds that Brown’s formula substantially follows that accepted by Buono Sales,
and thus Groseth by extension. Groseth, 440 N.W.2d at 278. Brown did not
include employee salaries for additional service technicians and/or
mechanics—a decision Siouxland has explicitly taken issue with—due to their
relevance to the entire Black Hills business, not just the distributor agreement
with MAC. When the agreement ended in 2013—regardless of if it was done
lawfully—Black Hills still assumedly had service technicians and mechanics on
salary to service other manufacturers’ product lines. Brown deducted the
commissions because they were tied directly to the sale of MAC trailers and
were a cost that would be directly allocable to the sale of MAC product. While
MAC and Siouxland may challenge the extent of the data Brown included as
‘variable expenses’ during cross-examination, this does not convert his opinion
into one that is based on gross profits rather than net profits. It is the jury’s
role to determine the weight to be given to Brown’s opinion.
Second, both MAC and Siouxland take great issue with Brown’s
exclusion of a twelve percent federal excise tax because its inclusion “would cut
significantly into the profits [Black Hills] would have obtained.” Docket 85 at 12
(“Brown ignored federal excise taxes. Every trailer sale incurs a tax of 12
percent of the sales price . . . .”). MAC argues that the omission of this
“undoubtedly avoided” cost renders Brown’s entire testimony inadmissible,
especially with its potential to mislead the jury. Docket 113 at 8-9 (“For [Black
Hills] . . . to argue that federal excise taxes should not be considered . . . is
truly incredible, though perhaps a perfect example of why the Court must
exercise its gatekeeping function here to prevent Brown’s junk science from
misleading the jury.”). Neither MAC nor Siouxland, however, cite a single case
where an expert witness’s opinion regarding net profit loss took into
consideration a reduction based on a 12% federal excise tax. The court will not
exclude Brown’s testimony on this basis.
The final datum that MAC and Siouxland contend was improperly
omitted from Brown’s analysis was Black Hills’ overhead charges. Docket 85 at
13 (“Brown also ignored overhead entirely.”). Brown testified to his reasoning
for not deducting overhead costs from the total damages calculation in his
deposition: “If [Black Hills] would have any material increase (of overhead) that
would be variable . . . because of the sales of MAC trailers . . . not just the
general business, but actually related to that revenue, then those could be
included. But my understanding is that there aren’t any, there wouldn’t be
any.” Docket 86-6 at 16.
The South Dakota Supreme Court held that a jury is “not to award the
costs of fixed future overhead costs which . . . can [be] avoid[ed] by cutting
costs or can apply to some other profitable use.” Groseth, 440 N.W.2d at 278.
Groseth followed the Third Circuit’s interpretation in Buono Sales, 449 F.2d at
719, agreeing that “no offset should be made against gross profits because the
breach did not relieve plaintiff of such expenses[.]” The Third Circuit also found
the expert’s testimony sufficiently reasoned why overhead charges were not
included as “variable costs” in his report, thus finding his methodology reliable.
Id. at 719-20 (finding that a business is “entitled to damages if the breach
deprives it of additional revenue which it could have used to help defray its
Here, Brown omitted overhead in his calculation of variable/avoided
costs, but he also did not include overhead expenses as money Black Hills is
entitled to recover in his damages report. He testified that Black Hills
represented that it has a fixed overhead that would not be lowered, nor
affected, by the loss of its MAC product line. See Docket 86-6 at 3. For this
reason, it follows that Brown did not find overhead to be a cost that needed to
be included—either by subtracting from or adding to Black Hills’ profits—as it
was fixed within the company regardless of whether or not Black Hills was
licensed to sell MAC trailers. See Groseth, 440 N.W.2d at 278 (finding the
correct measure of damages is the amount of net profits “plus the amount of
fixed future overhead expenses which . . . cannot be avoided by cutting costs or
[applying] to some other profitable use.”) (emphasis omitted).
Legally, all that is required to ensure proper methodology is the
utilization of the correct precedential formula, i.e., subtracting variable
expenses from gross profits. Groseth, 440 N.W.2d at 277-78. Because that is
the methodology used, this court finds that his methodology is reliably
sufficient, and thus admissible as governed by Rule 702.
Brown’s Testimony is Probative to Assist the Jury in
Understanding Plaintiff’s Potential Lost Profits.
Regardless of the court’s finding that Brown’s testimony is admissible
purely on his credentials and methodology, Federal Rules of Evidence 403 and
703 assign the court wide discretion in determining whether to include or
exclude expert testimony. Under Rule 703, an expert’s testimony may be
disclosed to the jury—even “if the facts or data would be otherwise
inadmissible”—if the opinion’s “probative value in helping the jury evaluate the
opinion substantially outweighs [its] prejudicial effect.” Fed. R. Evid. 703. Rule
403 states, in relevant part, that evidence may be excluded “if its probative
value is substantially outweighed by a danger of . . . unfair prejudice . . . [or]
misleading the jury[.]” Fed. R. Evid. 403.
MAC and Siouxland contend that Brown’s testimony will not assist the
jury due to the “plethora” of flaws they allege are present in his report. Docket
85 at 1-2. The fact that speculation is present does not always rise to the level
of inadmissibility. While some courts have excluded testimony found to be too
steeped in speculative calculations to be helpful to the jury, the court does not
find that to be the case here with Brown’s opinion. Under Rules 403, 702, and
703, the court finds that, unless extenuating circumstances of unreliability are
present, expert testimony should be admitted to be weighed by a jury. See
Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001) (stating that
Rule 702 clearly is one of admissibility rather than exclusion).
In weighing the admittance of Brown’s testimony in light of these Rules,
the court finds that the benefit to the jury is far more probative than it is
prejudicial. The jury is unlikely to be as knowledgeable in the field of profit
evaluation as Brown is, and thus less likely to understand the facts of the case
in the manner required to reach an informed and justified verdict. All parties
became understandably confused when deposing Brown about the nuances of
lost profits, so it can be reasonably assumed that the average layperson will be
just as, if not more, confused during trial. See Docket 86-6; see also Docket
88-1. Because there are many issues of fact challenged by MAC and Siouxland,
it will be probative for the jury to hear each side’s posited opinions and the
respective challenges during cross-examination. Daubert, 509 U.S. at 595
(finding that “vigorous cross-examination [and] presentation of contrary
evidence . . . are the traditional and appropriate means of attacking shaky but
Under the facts of this case, the court finds that Black Hills has fulfilled
its burden to proffer evidence regarding the admissibility of Brown’s expert
testimony through evidence that is sufficient to meet the standard set by Rule
702 and Daubert.
Thus, it is
ORDERED that defendants’ joint motions (Dockets 84 and 88) to exclude
expert testimony of Wayne Brown are denied.
Dated July 10th, 2017.
BY THE COURT:
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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