Volume 18, Number 6
September 2001

FRANCHISE LAW

Challenges to Expert Testimony in Franchise Cases after Daubert

By Kevin M. Kennedy

In Daubert v. Merrell Dow Pharmaceuticals the Supreme Court held that the trial judge "must ensure that any and all scientific evidence is not only relevant but reliable." Factors for judges to consider are:

  • Whether the theory or technique has been or can be tested.
  • Whether the theory or technique has been subjected to peer review and publication.
  • The known or potential rate of error.
  • Whether the theory or technique has widespread acceptance in the scientific community.

In General Electric Co. v. Joiner, the Court held that judges were required to examine not only an expert's underlying methodology but also the reasonableness of the expert's resulting conclusion. Further, the Court held that the judge's decision to admit or exclude scientific expert testimony was reviewable for an abuse of discretion.

In Kumho Tire Co. v. Carmichael, the Court held that before admitting any type of expert testimony, the judge must "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." This holding has particular significance to franchising, since most expert testimony admitted under Rule 702 in franchise disputes, including testimony in support of lost-profit damage claims, is nonscientific.

In Weisgram v. Marley Co., the Court held that if an appeals court concludes that expert testimony was improperly admitted at trial, and that the plaintiff could not satisfy his or her burden of proof without the testimony, the appellate court may enter judgment for the defendant.

Recent amendments to the Federal Rules of Evidence. The Federal Rules of Evidence have been amended to codify the standards set forth in Daubert and later Supreme Court decisions. The amended version of Rule 702 adds the requirement that the testimony is based on sufficient facts or data and is the product of reliable principles and methods, and that the witness has applied the principles and methods reliably to the facts of the case.

In order to "eliminate the risk that the reliability requirements set forth in Rule 702 will be evaded through the simple expedient of proffering an expert in lay witnesses [sic] clothing," Rule 701 was amended to add the provision that the testimony of a witness who is not testifying as an expert is limited to those opinions or inferences that are "not based on scientific, technical, or other specialized knowledge within the scope of Rule 702."

However, the Advisory Committee expressly left the door open for a party to introduce lay opinion in support of a lost-profit damage claim:

[M]ost courts have permitted the owner or officer of a business to testify to the value or projected profits of the business, without the necessity of qualifying the witness as an accountant, appraiser, or similar expert. Such opinion testimony is admitted not because of experience, training or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his or her position in the business. The amendment does not purport to change this analysis.

This loophole has practical limitations. A damage analysis offered by an officer or principal of a new business might not be admissible under Rule 701, since the testimony would not be predicated on the witness's "particularized knowledge" of any claimed losses "by virtue of his or her position in the business." Moreover, even if an officer or employee is allowed to testify in support of a lost-profit damage claim, the plaintiff may still need additional testimony from an expert to sustain its burden on damages. These factors, coupled with the obvious risk that the trier of fact will disregard projections coming from witnesses with a vested interest in the outcome, make the successful introduction of expert testimony a critical part of a lost-profit damages case, and limit the opportunities for a plaintiff to use Rule 701 to evade the more stringent requirements on expert testimony set forth in Rule 702.

Exclusion of lost future profit claims. Daubert has spawned successful challenges to the admission of expert testimony on lost future profit damages in several franchise, distributor, and dealer cases. Testimony has been excluded, for example, on the witness's failure to perform an independent market analysis to verify the reasonableness of the contract quotas against the actual number of units and average unit sales; failure to verify sales data on which the expert bases his or her assumptions, ignoring tax returns, knowing little about the industry, and failing to perform or review any market surveys; failing to point to reliable evidence that would bridge any gap between the facts and the expert's conclusions; and an analysis that is too divorced from reality to be admissible, with actual performance of the business being the critical factor in evaluating the expert's projections, which may improperly rely on the defendant's unsupported sales projections.

Cases admitting expert testimony. There are many franchise, distributor, and dealer cases in which a claim for lost future profits has survived judicial scrutiny. For example, in Drews Distributing, Inc. v. Leisure Time Technology, Inc., the Fourth Circuit held that the trial court had not abused its discretion in ruling that an economist had a reasonable basis on which to calculate damages. Rather than rely on unsupported projections, the expert reviewed the actual sales data of the product in the area where the distributor was to have exclusive rights, as well as government revenue reports supporting the sales data. In another case, the court admitted the testimony of the debtor's expert to quantify the damages caused by a manufacturer's breach of a distributorship agreement, even though the court found that the expert's prediction that sales would have risen unchecked in the absence of the violation was speculative, and this erroneous assumption forced the court to substitute its own factual assumptions for those supplied by the expert to arrive at a lower damages figure. The court emphasized that, although it disagreed with some of the expert's projections, the damage analysis was predicated on generally acceptable statistical methods that the court itself employed in awarding damages.

Practical tips for asserting and defending against a Daubert challenge. A Daubert challenge should be asserted before trial, either through a motion for summary judgment or in a motion in limine, and before the expert testifies. Proposed expert testimony may be challenged on three grounds: qualifications, methodology, or conclusions.

Challenging an expert's qualifications will raise questions with the judge about whether the expert knows what he or she is talking about, and may cause the judge to take a harder look at the expert's underlying methodology and conclusions.

Courts considering a challenge to the methodology will ask:

  • Did the expert rely on the available sales data of the subject business in making projections?
  • Did the expert perform or review market surveys?
  • Did the expert review comparable sales data for similarly situated businesses, industrywide averages, or both?
  • Did the expert review existing data concerning the expenses or profit margin of the business?
  • Is the methodology employed endorsed by other experts in the field? Courts considering a challenge to the expert's conclusions will ask:
  • Did the expert take reasonable steps to ensure the accuracy of the information on which the conclusions are based?
  • Were the expert's sales and profit projections reasonably based on the data relied on, or simply a function of "subjective belief or unsupported speculation"?
  • Did the expert project lost-profit damages for an unreasonably long time into the future?
  • Is the expert's analysis consistent with all available data, or did the expert ignore relevant information in an attempt to inflate the alleged damages?

Kevin M. Kennedy is a partner in the New Haven, Connecticut, office of Wiggin & Dana.

This article is an abridged and edited version of one that originally appeared on page 167 of Franchise Law Journal, Spring 2001 (20:4).

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