Keystone Transportation Solutions, LLC v. Northwest Hardwoods, Inc et al
Filing
208
MEMORANDUM OPINION. Signed by Judge Elizabeth K. Dillon on 4/22/2019. (jv)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
HARRISONBURG DIVISION
KEYSTONE TRANSPORTATION
SOLUTIONS, LLC,
Plaintiff,
v.
NORTHWEST HARDWOODS, INC., et al.,
Defendant.
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4/22/2019
S/J.Vasquez
Civil Action No. 5:18-cv-00039
By: Elizabeth K. Dillon
United States District Judge
MEMORANDUM OPINION
Pending before the court are defendants’ motions to exclude plaintiff’s proffered expert,
Brian Burns, and to strike Burns’s rebuttal report. (Dkt. Nos. 66, 70.) For the reasons set forth
below, the court will deny the motion to exclude Burns as an expert witness and deny the motion
to exclude Burns’s rebuttal expert report.
I. BACKGROUND1
Keystone was a logistics company that specialized in the export of forest products and
operated from the Inland Port of Virginia (VIP). Leading up to its creation, Keystone’s founders
conducted research about transportation inefficiencies in the forest products market.
Specifically, they found that the industry’s reliance on trucking, with greater weight restrictions
and increased fumigation costs, was inefficient. This research, and the experience gained over
the first few years of Keystone’s existence, led Steffens to develop the “Shipper Savings Model”
(SSM). Steffens considered the SSM to be Keystone’s most valuable trade secret. SSM’s “high
level conclusions” were not unique, but its specific findings on savings were confidential.
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The factual background underlying the entire case is covered in more detail in other opinions, such as the
court’s opinion on summary judgment, and the court will not repeat it here. For purposes of this motion, the court
focuses on Burns and his damages calculations.
Keystone’s model could only be conducted at this specific site at the VIP—any attempted
replication elsewhere would suffer from the same inefficiencies originally identified by
Keystone.
Keystone began negotiations regarding a business relationship with Northwest
Hardwoods (NWH), a supplier and manufacturer of hardwood, in February 2016. In the months
that followed, NWH conducted a “test run” through Keystone’s site at the VIP and the parties
exchanged information, including the SSM, following the signing of an NDA. Eventually,
Keystone presented an offer for its purchase to NWH. NWH rejected that offer, but shortly after,
Thomas Mereen, Keystone’s president at the time, resigned and went to work at NWH.
Unbeknownst to Keystone, NWH was investigating taking over the VIP site itself.
Keystone then turned its focus to its ongoing negotiations with another party, World
Distribution Services (WDS). After the parties entered into a letter of intent for WDS to
purchase Keystone’s business, WDS rescinded the letter because it had been informed that a
notice of default had been sent to Keystone and an unnamed party (NWH) would assume
Keystone’s license at the VIP. After WDS rescinded the letter of intent, Keystone ceased its
operations on March 2, 2017, and on the next day, March 3, 2017, NWH executed a license
agreement for Keystone’s former premises. Since entering into this license agreement, NWH
has performed the log loading services at the VIP.
Keystone alleges claims against defendants NWH and Mereen that arise from their
business dealings and subsequent events. Defendants contend that Keystone was a failing
business, the VIP first approached NWH, Keystone had no trade secrets, and defendants did not
appropriate or use Keystone’s trade secrets or violate the NDA. Keystone retained Brian Burns,
director of Dixon Hughes Goodman LLP, to conduct valuation services and quantify economic
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damages to Keystone allegedly caused by NWH’s conduct. Keystone has offered two reports
from Burns containing his opinions on the calculation of damages: his November 18, 2018 report
and his January 10, 2019 rebuttal report. (Dkt. Nos. 99-2, 99-3.)
Defendants seek to exclude Burns’s testimony, contending that his calculations of three
measures of damages (disgorgement of NWH’s profits and cost-savings from using trade secrets,
reasonable royalty for trade secret use, and loss of business value) are misleading and unreliable
because of flawed methodology. Defendants also ask that the court strike Burns’s rebuttal report
and testimony, contending that it exceeds the scope of rebuttal and presents new opinions to
buttress initial opinions after flaws regarding those opinions were mentioned to him.
II. DISCUSSION
A. Legal Standards
Rule 702 of the Federal Rules of Evidence governs admissibility of expert testimony.
The testimony of a witness “who is qualified as an expert by knowledge, skill, experience,
training, or education” is admissible if: “(1) the expert’s scientific, technical, or other specialized
knowledge will help the trier of fact to understand the evidence or to determine a fact at issue;
(2) the testimony is based upon sufficient facts or data; (3) the testimony is the product of
reliable principles and methods; and (4) the expert has reliably applied the principles and
methods to the facts of the case.” Fed. R. Evid. 702.
After an individual qualifies as an expert, this court has an obligation under Daubert to
act as a gatekeeper and ensure that any testimony concerning scientific, technical, or other
specialized knowledge offered in support of a party’s claim is “not only relevant, but reliable.”
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993); Kuhmo Tire Co. v. Carmichael,
526 U.S. 137, 147 (1999) (quoting same). When testimony is based upon “technical” or “other
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specialized knowledge,” it is admissible if: (1) the expert is qualified to testify competently
regarding the matters he intends to address; (2) his methodology is sufficiently reliable; and (3)
the testimony will assist the trier of fact by bringing the expert’s knowledge to bear upon a fact
in issue. See Daubert, 509 U.S. at 589–91. Thus, the court must determine whether the expert’s
reasoning and methodology underlying his testimony is valid, and whether that reasoning or
methodology was applied reliably to the facts, so as to be relevant and helpful to the jury.
See id. at 591–92; Kumho Tire Co., 526 U.S. at 147.
The proponent of the testimony must establish its admissibility, although it need not
prove its expert’s theory is correct. Cooper v. Smith & Nephew, Inc., 259 F.3d 194, 199 (4th Cir.
2001); Maryland Cas. Co. v. Therm–O–Disc, Inc., 137 F.3d 780, 783 (4th Cir. 1998).
Indeed,
“[v]igorous cross examination, presentation of contrary evidence and careful instruction on the
burden of proof are traditional and appropriate means of attacking shaky but admissible
evidence.” Daubert, 509 U.S. at 596. Nonetheless, “[t]he main purpose of Daubert exclusion is
to protect juries from being swayed by dubious scientific testimony.” Nease v. Ford Motor Co.,
848 F.3d 219, 2131 (4th Cir. 2017) (citation omitted).
The Fourth Circuit has explained the Daubert standard as a “two-step gatekeeping
function” required of trial courts. First, the trial court must ask whether proffered scientific
evidence is valid and reliable. United States v. Barnette, 211 F.3d 803, 815 (4th Cir. 2000).
Second, the court asks whether the evidence will help the trier of fact, which is generally a
question of relevance, or “fit”: assuming the evidence is reliable, will it “assist the trier of fact to
understand or determine a fact in issue.” Maryland Cas. Co., 137 F.3d at 784 (quoting Daubert,
509 U.S. at 592). The court’s role in limiting expert testimony is important: “due to the
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difficulty of evaluating their testimony, expert witnesses have the potential to be both powerful
and quite misleading.” Cooper, 259 F.3d at 199.
B. Burns’s Lump-Sum Damages Opinion
Defendants first argue that Burns’ opinion is unreliable and unhelpful because he does
not conduct analysis for each trade secret, but offers a lump-sum damages opinion “that
transforms the alleged value of all log and lumber loading at a public port into damages.” They
also argue that Burns has not shown the causal link between his damages calculation and their
alleged misconduct since he assumes that all of Keystone’s lost business value is attributable to
defendants, and in his reasonable royalty and disgorgement opinions, he allocates all of the
forecasted avoided costs and net profits to the trade secrets. This is unreasonable, defendants
assert, because it “effectively concludes that [Keystone] as a hypothetical licensor would be
entitled to 100 percent of any profits from a licensee’s operation of a logistics business using the
alleged trade secrets at the VIP.” (Mem. Supp. Mot. Exclude Op. & Test. Burns 14–17, Dkt. No.
80.)
Defendants cite to KW Plastics v. U.S. Can Co., 131 F. Supp. 2d 1289, 1295 (M.D. Ala.
2001), to argue that Burns’s opinion is unreliable because he has not disaggregated the value of
the alleged trade secrets. However, the primary reason why the court in KW Plastics excluded
the expert’s opinion is because he did not consider whether the misappropriated trade secrets
caused the defendant’s unjust enrichment, not because he failed to assign values to each specific
trade secret. Id. This case from the district court of Alabama does not support a finding of
unreliability simply because Burns has not separated his damages value per trade secret.
Additionally, a case cited by both parties, O2 Micro Inter. Ltd. v. Monolithic Power Sys.,
Inc., 399 F. Supp. 2d 1064 (N.D. Cal. 2005), is instructive here. Defendants highlight that the
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court in O2 excluded plaintiff’s expert’s testimony when the expert bundled all the trade secrets
together. However, as plaintiff notes, the procedural posture of the case there must be
considered. It was only after the jury trial and plaintiff’s failure to prove that all the trade secrets
were misappropriated that the court excluded the expert’s damages calculation. Because the
expert’s damages calculation was based on the assumption that all of the trade secrets were
misappropriated, but the jury only found that five of the eleven trade secrets were
misappropriated and only one trade secret resulted in the defendant’s unjust enrichment, the
court found that the expert’s damages calculation was, at that point, “useless to the jury” and left
them “without sufficient evidence, or a reasonable basis, to determine the unjust enrichment
damages.” Id. at 1076–77. While Keystone may consider the court’s warning in O2 about
bundling all of its trade secrets together for its damages calculation, id. at 1076, the case does not
stand for the proposition that Burns’s damages opinion should be excluded at this point—before
Keystone has had the opportunity to prove its alleged claims. His opinion is relevant if the jury
finds that NWH did misappropriate all alleged trade secrets.
Moreover, any potential prejudice from Burns’s expert opinion and testimony—with his
lump-sum damages calculation—can be cured by a limiting instruction, if appropriate, to the jury
to only consider his opinion if it finds that all information he relied on to make his calculation
constitutes a trade secret. See, e.g., United States v. Lane, 883 F.2d 1484, 1498 (10th Cir. 1989)
(“As a general rule, we presume that juries follow [limiting] instructions.”); United States v.
Sahakian, No. CR 02-938 (A) VAP, 2007 WL 9676546, at *4 (C.D. Cal. Nov. 27, 2007) (“If the
Court finds that the jury is possibly being misled or confused by the expert witness testimony,
the Court may instruct the jury . . . [with a] limiting instructions to cure the prejudice.”).
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C. Burns’s Reasonable Royalty and Unjust Enrichment Opinions
Burns’s opinion regarding defendants’ unjust enrichment includes: 1) disgorgement of
NWH’s unjustly earned profits and avoided cost on sales, and 2) an assessment of reasonable
royalty against NWH for misappropriation of trade secrets. (Burns Report 33, Dkt. No. 99-2.)
Defendants argue that Burns’s reasonable royalty calculation is unreliable and speculative
because he replaced an accepted methodology with his own fee-per-container method, his use of
“speculative volume projections” does not resemble “NWH’s actual and anticipated experience
at the VIP,” and he included lumber volumes in his analysis, although NWH has not shipped
lumber at VIP. (Mem. Supp. Mot. Exclude Op. & Test. Burns 17–20.) Defendants also argue
that Burns’s disgorgement opinion should be excluded because NWH has received no economic
benefit at the VIP from 2017–2018, it does not consider that Keystone was being terminated
regardless of NWH’s alleged conduct, it includes lumber, and it assumes that Keystone’s license
would have been continually renewed. They highlight that Burns did not limit his analysis of
lost profits to the time that the alleged trade secrets would have remained confidential before
NWH would have properly obtained them.
As to reasonable royalty damages, Keystone argues that the disagreement between its
expert and defendants’ expert is not a proper basis for excluding Burns’s opinion and that Burns
extensively defended his methodology in his initial and rebuttal reports. Keystone also contends
that the method for calculating royalty damages is not as rigid as defendants suggest. (Mem.
Opp. Mot. Exclude Op. & Test. Burns 11–13, Dkt. No. 99.) As to disgorgement and avoided
costs, Keystone asserts that whether its lease would have been terminated anyway is a question
of fact for the jury, that lumber should be included in the calculation (NWH has performed test
loads with lumber and it was included in its forecasts), and there is no specific requirement that
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the damages calculation be tied to the time the trade secrets would have remained secret. As to
the reliance on inaccurate financial projections, Keystone notes that Burns addresses this in his
rebuttal report. (Id. at 9–11.)
Notably, in trade secrets cases, “[c]omputing damages . . . is not cut and dry.” Am. Sales
Corp. v. Adventure Travel, Inc., 862 F. Supp. 1476, 1479 (E.D. Va. 1994). The Fifth Circuit has
recognized that trade secret misappropriation cases require a flexible and imaginative approach
to damages, and are controlled by their own peculiar facts and circumstances. Univ. Computing
Co. v. Lykes-Youngstown Corp., 504 F.2d 518, 538 (5th Cir. 1974).
The Defend Trade Secrets Act is silent on what qualifies as a “reasonable royalty” for a
defendant’s use of a misappropriated trade secret, and the Fourth Circuit has not addressed the
issue. See 18 U.S.C. § 1836(b)(3)(B)(ii). Consequently, courts within the Fourth Circuit have
turned to University Computing, which “is a leading case on calculating a reasonable royalty.”
Check ‘n Go of Va., Inc. v. Laserre, No. CIV.A.6:04 CV 00050, 2005 WL 1926609, at *5 (W.D.
Va. Aug. 9, 2005). The court in University Computing explained that “a reasonable royalty is
simply that amount which the trier of facts estimates a person desiring to use a [trade secret]
would be willing to pay for its use and a [trade secret] owner desiring to license the [trade secret]
would be willing to accept.” 504 F.2d at 537 n.31. Calculations under this approach imagine a
“hypothetical negotiation” between the plaintiff and defendant “to ascertain the royalty upon
which the parties would have agreed had they successfully negotiated an agreement just before
[misappropriation] began.” Lucent Techs., Inc. v. Gateway, Inc., 580 F.3d 1301, 1324 (Fed. Cir.
2009). The ultimate goal of this theoretical framework is to measure “the actual value of what
has been appropriated.” Univ. Computing, 504 F.2d at 537 (internal quotations omitted).
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The court has considered all of defendants’ objections to Burns’s methodology for his
reasonable royalty calculations and concludes that none of them require the exclusion of his
opinions. First, while his methodology is challenged by Kleinrichert, defendants’ expert, the
court cannot say that Burns’s methodology is not sufficiently reliable or accepted in the field. As
the court views it, Burns and Kleinrichert simply have different approaches to calculating
damages, and there are, perhaps, pros and cons to each approach. Those pros and cons are the
types of issues that can be addressed through cross-examination and the presentation of contrary
evidence. See United States v. Moreland, 437 F.3d 424, 431 (4th Cir. 2006) (“As with all other
admissible evidence, expert testimony is subject to testing by ‘vigorous cross-examination,
presentation of contrary evidence, and careful instruction on the burden of proof.’” (quoting
Daubert, 509 U.S. at 596)). Moreover, unlike the hypothetical negotiation methodology for
which defendants argue, Burns’s fees-per-container methodology uses actual numbers, and in
doing so, attempts to measure the “actual value of what has been appropriated”—the very
purpose of the hypothetical negotiation approach. Univ. Computing, 504 F.2d at 537.
With regard to his unjust enrichment damages calculation as a whole, Burns has
explained why he applied the methodology that he used, and those explanations are not based
merely on his say-so. (Burns Report 10–11, 33–35, 46–54.) Recognizing that, “in the trade
secret misappropriation context, the proper measure of unjust enrichment damages is the total
gains of a defendant’s wrongdoing,” Burns appears to have applied a proper and reliable
methodology in his report. Steves & Sons, Inc., No. 3:16-cv-545, 2018 U.S. Dist. LEXIS 80306,
at *19 (E.D. Va. May 10, 2018). Indeed, he testified his belief that “the entire business of
[Keystone] was misappropriated for all intents and purposes,” including the “lease, the
assembled workforce, the customer relationships, the ingate and outgate data, the processes, et
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cetera,” and he based his opinions on this belief. (Burns Dep. 230–40, Dkt. No. 99-16.) While
defendants are free to pursue vigorous cross-examination on this topic, the court cannot say,
based on the supposed discrepancies, that the analysis is so flawed as to be unreliable and
inadmissible.
Further, Burns’s methodology, in addition to the other issues that defendants have with
his opinion, including his allegedly speculative volume projections, the inclusion of lumber,
NWH’s economic benefit at the VIP, and Burns’s assumptions about Keystone’s license, all do
not pertain to the admissibility of Burns’s expert opinion. Indeed, this court, in exercising its
discretion, “need not determine that the proffered expert testimony is irrefutable or certainly
correct”; instead, it must only find that the testimony is “reliable and relevant and thus
admissible under Daubert.” Moreland, 437 F.3d at 431 (quoting Daubert, 509 U.S. at 596).
Again, everything defendants have raised about Burns’s assumptions and opinions is subject to
“vigorous cross-examination, presentation of contrary evidence, and careful instruction on the
burden of proof.” Id. (quoting Daubert, 509 U.S. at 596). Having reviewed the parties’ briefing
on this issue, the court concludes that whether Burns’s opinion is correct is an issue the jury may
consider in deciding its weight, but it does not affect its admissibility because the court does not
find that it is unreliable.
D. Burns’s Lost Value Calculation
Defendants also argue that Burns’s lost value calculation for Keystone’s “Before Harm
Value” improperly uses a “going concern value” rather than a liquidation value because
Keystone was “on its deathbed” or “nominally in existence.” They point to evidence to show
that Keystone was in financial trouble and argue that the “Before Harm Value” was materially
overstated. (Mem. Supp. Mot. Exclude Op. & Test. Burns 25–28.)
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In contrast, Keystone maintains that Keystone was a going concern prior to defendants’
allegedly harmful conduct. Like defendants, Keystone provides evidentiary support for its
position. Keystone also contends that the determination of whether it was a going concern is a
question of fact for the jury. (Mem. Opp. Mot. Exclude Opinions & Test. Burns 9.)
Again, this is a difference in opinion between experts and does not call into question the
reliability or admissibility of Burns’s opinion. This is not a situation where Burns’s expert
opinion is too speculative or based on assumptions unsupported by the record. Cf. Concordia
Pharm., Inc. v. Method Pharm., LLC, No. 3:14-cv-00016, 2016 WL 1464639, at *6 (W.D. Va.
Apr. 13, 2016) (excluding an expert’s opinion on damages because it was based on unsupported
assumptions). The jury will have to determine whether Keystone was properly considered a
going concern. Thus, the differing opinions between the experts are proper for jury
consideration. See Mosser v. Fruehauf Corp., 940 F.2d 77, 83 (4th Cir. 1991) (endorsing the
notion that the jury should weigh the evidence and credibility of competing experts).
E. Burns’s Rebuttal Report
Defendants claim that Burns’ rebuttal report is an improper attempt to correct and bolster
his initial report. They note that Burns changed the date of harm for his lost value calculation
and argue that this was because he realized the date in his initial report (December 31, 2016) was
unreliable. Defendants also argue that Burns attempts to offer new opinions “in the guise of
recalculations” for his disgorgement opinions and that the rebuttal report is the first time he
opines that transloading of lumber “is the highest and best use of VIP” for NWH. Last,
defendants point out that while Burns says he recalculated his reasonable royalty opinion based
on the mathematical errors identified by their expert, he did not say specifically what he
corrected. (Mot. Strike Burns Rebuttal Report, Dkt. No. 66.)
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Keystone argues that the new date of harm was included by Burns after reviewing
additional discovery to rebut the defendants’ expert’s opinion. It also states that several
documents and depositions that he relied upon were not made available to Burns until after the
deadline for his initial report. As to the disgorgement and reasonably royalty opinions, plaintiff
argues that the figures in Burns’s report are “literal recalculations” of defendants’ expert’s
calculations. (Mem. Opp. Mot. Strike 3–4, Dkt. No. 98.)
Rebuttal evidence is defined as “evidence given to explain, repel, counteract, or disprove
facts given in evidence by the opposing party.” United States v. Stitt, 250 F.3d 878, 897 (4th Cir.
2001) (quoting Black’s Law Dictionary 1267 (6th ed. 1990)). An expert report “must directly
address an opposing expert’s findings or opinions to qualify as rebuttal.” See Boles v. United
States, No. 1:13-cv-489, 2015 WL 1508857, at *4 (M.D.N.C. Apr. 1, 2015). A rebuttal report
does not “permit an expert to correct mistakes based on information that was available to the
expert well in advance of the issuance of his report.” Snider-Jefferson v. Amigo Mobility Int’l,
Inc., No. 2:15-CV-406, 2016 WL 4424954, at *4 (E.D. Va. Aug. 17, 2016). “Expert reports that
simply address the same general subject matter as a previously-submitted report, but do not
directly contradict or rebut the actual contents of that prior report, do not qualify as proper
rebuttal or reply reports.” Boles, 2015 WL 1508857, at *2.
The court has reviewed Burns’s rebuttal report and finds that it primarily addresses
defendants’ expert’s report. This is precisely the intended purpose of rebuttal evidence. The
only new conclusion that it set forth is the date of harm for his lost value calculation because,
according to Burns, defendants’ expert revealed a mathematical error he had made. Moreover,
Burns identifies the new information upon which he relies in his rebuttal report, including
evidence of emails and phone calls. (Burns Rebuttal Report 3–6, Dkt. No. 99-3; Appendix A to
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Burns Rebuttal Report, Dkt. No. 99-4.) Thus, his report properly addresses the opposing
expert’s findings and makes changes based on information that was not available to him at the
time of his initial report. For these reasons, his rebuttal report will not be struck.
III. CONCLUSION
For the foregoing reasons, the court will deny the motion to exclude Burns as an expert
and deny the motion to strike Burns’s rebuttal report. An appropriate order will be entered.
Entered: April 22, 2019.
/s/ Elizabeth K. Dillon
Elizabeth K. Dillon
United States District Judge
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