RMS Inc v. Shea-Kiewit Joint Venture et al
Filing
164
DECISION AND ORDER signed by Magistrate Judge Nancy Joseph on 4/22/2016 granting in part and denying in part plaintiff's Daubert motion 84 . RMS' Daubert motion to exclude the testimony of Stuart Lipofsky as to interpretation of the subc ontract and construction industry practice regarding labor unions is DENIED AS MOOT and RMS' Daubert motion to preclude Lipofsky from testifying as an expert as to the defendants' damages on its counterclaim is GRANTED. RMS' Daubert motion striking paragraphs 3-5, 30-37, and 56-59 from the expert report of Terence Rodgers and precluding Rodgers from testifying on those subjects is GRANTED. IT IS FURTHER ORDERED that the Court will hold an evidentiary hearing as to the defenda nts' motion to strike RMS' damages expert, Michael Betters. The Clerk of Court will contact the parties to arrange scheduling this hearing. Three days before the hearing, the parties are to submit a letter indicating the names of the witnesses that will appear and an estimate of the amount of court time the hearing will take. (cc: all counsel) (llc)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
RMS OF WISCONSIN, INC.,
Plaintiff,
v.
Case No. 13-CV-1071
S-K JV and J.F. SHEA CONSTRUCTION,
INC.,
Defendants.
DECISION AND ORDER ON PLAINTIFF’S
AND DEFENDANTS’ DAUBERT MOTIONS
Before me are the plaintiff’s, RMS of Wisconsin, Inc., and the defendants’, S-K JV
and J.F. Shea Construction, Inc., motions to exclude expert testimony pursuant to Daubert
v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). RMS seeks to bar Stuart Lipofsky
from testifying as an expert and to strike portions of the expert report of Terence Rodgers.
(Docket # 84.) The defendants seek to exclude RMS’ damages expert, Michael Betters.
(Docket # 89.) For the reasons discussed below, the plaintiff’s motion is granted in part and
denied as moot in part and I will reserve judgment on the defendants’ motion pending a
Daubert hearing.
BACKGROUND
The underlying facts of this case are detailed in this Court’s decision and order
granting both parties’ motions for partial summary judgment. (Docket # 150.) For
background purposes here, RMS performs excavating and shaft digging work and has
performed this work for the defendants in the past. At issue in this case is a subcontract
agreement entered into by the parties for the Indianapolis Deep Tunnel Project. As part of
its bid to get the contract on the Deep Tunnel Project, the defendants warranted that they
would make a good faith effort to award a percentage of their subcontracting dollars to
“minority business enterprises,” which includes “women-owned business enterprises.” RMS
has been certified as a women-owned business enterprise. RMS alleges that the defendants
never intended to honor the subcontract agreement, but rather used RMS as a “passthrough” to fulfill the requirement to employ women-owned business enterprises. RMS sued
the defendants for fraud in the inducement, breach of contract, and breach of the covenant
of good faith and fair dealing. Both parties moved for partial summary judgment. The
defendants moved for dismissal of RMS’ fraud in the inducement claim, which was granted.
RMS moved to declare the subcontract agreement a lump sum contract (as opposed to a
time and materials contract), which was also granted.
Both parties have also filed Daubert motions. RMS has moved to exclude the expert
testimony of Stuart Lipofsky, the defendants’ project manager, and portions of the expert
report of Terence Rodgers, the defendants’ damages expert. The defendants have moved to
exclude the opinion of Michael Betters, RMS’ damages expert. I will address each in turn.
DISCUSSION
The admissibility of expert testimony is governed by Federal Rule of Evidence 702
and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). Ervin v. Johnson &
Johnson, Inc., 492 F.3d 901, 904 (7th Cir. 2007). Rule 702 provides that:
A witness who is qualified as an expert by knowledge, skill, experience,
training, or education may testify in the form of an opinion or otherwise if:
(a) the expert’s scientific, technical, or other specialized knowledge will help
the trier of fact to understand the evidence or to determine a fact in issue; (b)
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the testimony is based on sufficient facts or data; (c) the testimony is the
product of reliable principles and methods; and (d) the expert has reliably
applied the principles and methods to the facts of the case.
The inquiry consists of three general areas: (1) the testimony must be “helpful,” which
dovetails with the relevance requirements of Fed. R. Evid. 401–403; (2) the expert must be
qualified by knowledge, skill, experience, training, or education; and (3) the testimony must
be reliable and fit the facts of the case. Lyman v. St. Jude Medical S.C., Inc., 580 F. Supp. 2d
719, 722 (E.D. Wis. 2008).
Under the third part of the analysis, the court examines whether (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. Fed. R. Evid. 702. The court acts “as a ‘gatekeeper’ for expert testimony, only
admitting such testimony after receiving satisfactory evidence of its reliability.” Dhillon v.
Crown Controls Corp., 269 F.3d 865, 869 (7th Cir. 2001). To help ensure the reliability of
expert testimony, the court considers, for example, whether the theory can be and has been
verified by the scientific method through testing, whether the theory has been subjected to
peer review, the known or potential rate of error, and the general acceptance of the theory in
the scientific community. Cummins v. Lyle Indus., 93 F.3d 362, 368 (7th Cir. 1996).
Finally, despite the court’s role as a gatekeeper, expert testimony is liberally
admissible under the Federal Rules of Evidence. Lyman, 580 F. Supp. 2d at 723. “Vigorous
cross-examination, presentation of contrary evidence, and careful instruction on the burden
of proof are the traditional and appropriate means of attacking shaky but admissible
evidence.” Daubert, 509 U.S. at 596.
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RMS’ Daubert Motions
1. Stuart Lipofsky
Stuart Lipofsly is a professional engineer employed by J.F. Shea Construction, Inc.
as a Project Manager. (Decl. of Stuart Lipofsky (“Lipofsky Decl.”) ¶ 1, Docket # 126.)
Lipofsky is the Project Manager for the Indianapolis Deep Tunnel Project and has held that
position since September 2011. (Id.) The defendants seek to have Lipofsky testify as to the
interpretation of the subcontract, construction industry practice regarding labor unions, and
the defendants’ damages on its counterclaim. RMS objects to Lipofsky providing expert
testimony on these subjects. I will address each in turn.
1.1
Testimony as to Interpretation of the Subcontract and Construction
Industry Practice Regarding Labor Unions
In its Rule 26(b) disclosure, the defendants state that Lipofsky will provide expert
testimony in support of the fact that the subcontract between the parties was a time and
materials contract. (Declaration of Matthew M. Fernholz (“Fernholz Decl.”) ¶ 1, Exh. A,
Docket # 86-1.) RMS argues that Lipofsky cannot provide expert testimony as to the
interpretation of the contracts. My ruling on RMS’ summary judgment motion that the
subcontract was a lump sum agreement renders testimony from Lipofsky on this question
unnecessary. Thus, RMS’ motion with respect to this testimony is moot.
In its Rule 26(b) disclosure, the defendants also state that Lipofsky will provide
testimony in support of the following point:
Because experienced contractors are well aware that the work on their
projects covered by a union labor agreement will be done by union
members they may have no experience working with, they would not
be surprised to have workers on their payroll they have never worked
with before, especially on a project away from the contractors’ home
base where the labor will come from local union halls in the area of the
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project. So there is nothing unusual at all about RMS having workers
on its payroll that it had never before met or heard of.
(Fernholz Decl. ¶ 1, Exh. A.) RMS argues that Lipofsky is attempting to impermissibly
render expert testimony on the interpretation of the parties’ contract. The defendants argue
that Lipofsky is not acting as an expert in the interpretation of the parties’ contract; rather,
he is testifying about construction industry practices concerning union labor project
agreements and the hiring of union laborers by subcontractors.
It seems that the defendants are offering Lipofsky’s testimony on this matter to
counter RMS’ argument that the defendants were impermissibly “dumping” employees
onto RMS’ payroll, thus evidencing fraud in the inducement. Because I granted the
defendants’ motion for summary judgment dismissing RMS’ fraud in the inducement claim,
Lipofsky’s testimony on this matter is unnecessary. Thus, RMS’ motion with respect to this
testimony is also moot.
1.2
Testimony as to the Defendants’ Damages on its Counterclaim
The defendants allege that due to RMS’ non-performance under the subcontract,
they were forced to retain a more expensive subcontractor, Steppo Supply and Construction,
Inc., to replace RMS on the job. The defendants state that Lipofsky will offer testimony as
to their damages on the counterclaim. RMS argues that Lipofsky should be precluded from
testifying as a damages expert because during his deposition he was unable to articulate the
basis for the damages amount. The defendants argue that although expert testimony is not
required in this area, Lipofsky should be allowed to present his analysis regarding the
difference between what the defendants had to pay Steppo and what it would have been
required to pay RMS.
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The defendants make no attempt to establish Lipofsky’s qualifications to testify as to
the defendants’ damages. Lipofsky is the defendants’ project manager; however, it is unclear
how he is qualified to render expert testimony regarding damages. Did Lipofsky negotiate
the contract with Steppo? Does Lipofsky perform accounting work for the defendants?
Further, when questioned about how the defendants’ arrived at their damages number at his
deposition, Lipofsky could not explain what the numbers on their damages spreadsheet
represented. (Fernholz Decl. ¶ 5, Exh. E at 104-07, Docket # 86-5.) It is unclear how
Lipofsky’s testimony on this matter will assist the jury in understanding the evidence when
Lipofsky cannot explain how he arrived at the ultimate damages number. Thus, Lipofsky
will not be permitted to testify as an expert as to the defendants’ damages claim. For these
reasons, RMS’ motion as to this testimony is granted.
2. Terence Rodgers
Terence Rodgers is a Director and Shareholder in the Boston office of the Berkeley
Research Group in which he has provided consulting services to a variety of public and
private corporations as well as state and federal agencies for over 30 years. (Fernholz Decl. ¶
7, Exh. G at ¶ 7, Docket # 87.) Rodgers consults on business issues, including financial
analysis and lost profits. (Id.) Rodgers has been retained by the defendants to provide his
expert opinion regarding the damages recoverable by RMS attributable to the defendants’
actions. Rodgers was further asked to review and analyze the expert report of RMS’
damages expert, Michael Betters. (Exh. G at ¶ 2.)
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2.1
Testimony as to Fraud in the Inducement Claim
In paragraph 5 of his report, Rodgers opines that RMS has no damages on its fraud
in the inducement claim. (Id. ¶ 5.) Given the dismissal of RMS’ fraud in the inducement
claim, paragraph 5 should be stricken. Thus, RMS’ motion as to this testimony is granted.
2.2
Testimony Regarding Damages if Subcontract was Terminated for
Convenience
In paragraphs 3-4 Rodgers opines that if the defendants were found to have
terminated the subcontract for convenience, RMS’ damages would amount to $22,425.57.
(Id. ¶¶ 3-4.) Paragraphs 30-37 further explain how Rodgers reached his damages number
based on the provision of the subcontract that allowed the defendants to terminate the
contract for convenience. (Id. ¶¶ 30-37.) Finally, in paragraphs 56-59, Rodgers attacks the
opinion of RMS’ damages expert for failing to consider the terms of the subcontract that
allowed the defendants to terminate the agreement, such as the provision allowing for
termination for convenience. (Id. ¶¶ 56-59.)
RMS seeks to strike these paragraphs and preclude Rodgers from testifying about
those subjects at trial. RMS argues that Rodgers’ methodology for calculating RMS’
damages on its breach of contract claim was flawed because he uses Section 18’s liquidated
damages provision—which applies to termination for convenience—for calculating the
losses to RMS, despite the fact that the defendants never invoked this provision. The
defendants argue that “the point” of Rodgers’ testimony on this issue is that “RMS did not
have an absolute right to complete the subcontract, and that at any time S-K could have
terminated it for no reason at all, and all RMS would have been entitled to was damages
under the termination for convenience provision.” (Def.’s Br. in Opp. at 11, Docket # 128.)
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Section 18 of the subcontract provides that the contractor “may at any time and for
any reason terminate this Agreement for Contractor’s convenience upon three (3) days
notice or immediately upon any termination of Contractor.” (Fernholz Decl. ¶ 8, Exh. H at
9, Docket # 87-1.) However, there is no evidence that the defendants invoked this provision
to terminate the subcontract. Rather, in a letter sent to Tammy Miramontes, the president of
RMS, Lipofsky stated that the defendants were “providing notice under Section 17 of the
Subcontract that RMS is in material breach of the Subcontract and is considered to be in
default.” (Fernholz Decl. ¶ 9, Exh. I at 1, Docket # 87-2.) Section 17 of the subcontract
addresses material breaches of the agreement and provides for liquidated damages, in
addition to “other and additional damages,” including direct, indirect, incidental, or
consequential damages. (Docket # 87-1 at 9.) Because there is no support in the record for
utilizing section 18 of the subcontract to calculate the defendants’ damages, paragraphs 3-4
and 30-37 of Rodger’s report should be stricken. See Tyger Constr. Co. v. Pensacola Constr. Co.,
29 F.3d 137, 142 (4th Cir.1994) (“An expert’s opinion should be excluded when it is based
on assumptions which are speculative and not supported by the record.”).
Finally, paragraphs 56-59 should similarly be stricken. In these paragraphs, Rodgers
criticises RMS’ damages expert for failing to establish an independent review of the
subcontract and to determine what remedies the defendants could have invoked, such as the
provision providing for termination of the subcontract for convenience. It is unclear,
however, why RMS’ damages expert should be faulted for failing to speculate about how
the defendants could have terminated the agreement if there is no support in the record for
that scenario. As such, RMS’ motion as to this testimony is granted.
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The Defendants’ Daubert Motion
1.
Michael Betters
Michael Betters is a Certified Management Accountant and has been operating
Betters & Associates, S.C. since 1992. (Declaration of Michael Betters (“Betters Decl.”) ¶ 2,
Exh. 1, Docket #119-1.) Betters has worked as a tax preparer and provided outside
accounting services for RMS since May 2005. (Id.) Betters, along with Tammy Miramontes,
began calculating RMS’ projected loss from the Indiana Deep Tunnel Project in March
2012. (Id.) Betters provides an expert report as to RMS’ lost profit damages stemming from
the defendants’ alleged breach of the subcontract.
The defendants challenge Betters’ report principally on the grounds that the
methodology Betters used to calculate RMS’ lost profits is unreliable and therefore
inadmissible. Specifically, the defendants challenge Betters’ opinion that RMS’ labor costs
on the project would have constituted 28.43% of the total contract sum. The defendants
further challenge Betters’ opinion that RMS would have achieved a profit of 26.3% (which
Betters revised to 22.75%) on the subcontract.
The defendants argue that Betters “cherry picked” the data he used in determining
that labor costs would have constituted 28.43% of the total contract sum. The defendants
further argue that Betters failed to consider empirically supported alternative data and
methodologies. They argue Betters failed to calculate labor costs by estimating the amount
of hours it would take to complete the subcontract; did not apply all of the elements that
comprised RMS’ historical expense ratios from the Milwaukee Deep Tunnel Project to
check his work; and opined RMS would have achieved a profit of 26.3% (again, which
Betters revised to 22.75%) on the subcontract despite the fact that RMS had never
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performed at that level. The defendants also argue that the 26.3% profit figure came from
the “say-so” of Miramontes and Wilinski, who testified that RMS could perform the $6.785
million subcontract for $5 million, rather than from any sort of statistical analysis.
Betters’ methodology for calculating RMS’ labor costs and expenses, and thus
ultimately RMS’ profitability, is unclear. As stated above, my role is a “gatekeeper” to
ensure that the expert’s testimony is reliable. An evidentiary hearing will be useful in
making that determination. Thus, I will reserve judgment on the defendants’ Daubert motion
pending an evidentiary hearing.
ORDER
NOW, THEREFORE, IT IS ORDERED that RMS’ Daubert motion to exclude the
testimony of Stuart Lipofsky as to interpretation of the subcontract and construction
industry practice regarding labor unions (Docket # 84) is DENIED AS MOOT and RMS’
Daubert motion to preclude Lipofsky from testifying as an expert as to the defendants’
damages on its counterclaim is GRANTED. RMS’ Daubert motion striking paragraphs 3-5,
30-37, and 56-59 from the expert report of Terence Rodgers and precluding Rodgers from
testifying on those subjects is GRANTED.
IT IS FURTHER ORDERED that the Court will hold an evidentiary hearing as to
the defendants’ motion to strike RMS’ damages expert, Michael Betters. (Docket # 89.) The
Clerk of Court will contact the parties to arrange scheduling this hearing. Three days before
the hearing, the parties are to submit a letter indicating the names of the witnesses that will
appear and an estimate of the amount of court time the hearing will take.
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Dated at Milwaukee, Wisconsin this 22nd day of April, 2016.
BY THE COURT:
s/Nancy Joseph ____________
NANCY JOSEPH
United States Magistrate Judge
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