Pike: Background
Texas EMC Management, LLC, and EMC Cement BV (collectively, EMC) filed a lawsuit in Limestone County, Texas, against EMC’s former business manager and two of EMC’s limited partners, as well as VHSC, an entity that purchased EMC’s assets at a foreclosure sale initiated by its lender. Those assets included EMC’s cement plant and all of its personal property and intangible assets. Following the foreclosure sale, Pike went to work for VHSC. Even though VHSC’s actions with respect to the operation of the cement plant were consistent with the rights it obtained in the foreclosure sale, EMC alleged that its limited partners breached their fiduciary duties and its business manager conspired with VHSC to misappropriate trade secrets and tortiously interfere with EMC’s business.
Testimony of EMC’s Experts
EMC designated and called three expert witnesses at trial to testify regarding damages for the alleged “lost value” of the business and the market value of the real and personal property. The defendants objected to the testimony from EMC’s experts because their opinions not only were based on speculative and conclusory assumptions and projections that were unsupported by the evidence but also were wholly at odds with the company’s historical performance. Most notably, EMC’s experts’ opinions ignored the fact that EMC was a failed business enterprise, had more than $5 million in debt (compared to roughly $4 million in assets), and had never once generated a profit. As to the personal property and real property, EMC’s experts’ opinions on value (1) were based on the value of new equipment, not the depreciated, used equipment; and (2) ignored the debt on the plant and the equipment, which exceeded the expert’s valuation of the assets. The defendants argued that there was no evidence of causation because any alleged injury that EMC suffered was caused by its own business failings, not by the claimed actions of the defendants.
The trial court overruled the defendants’ objections at the time the testimony was offered and also denied the defendants a directed verdict. It was at this point that the defendants had to make a strategic decision regarding their own damages expert witness. There were gaping holes in EMC’s expert witness testimony. If the defendants called their expert witness to testify about the lack of damages and the deficiencies in the evidence presented by EMC, then EMC might have an opportunity to try to fill the evidentiary holes and perhaps present an alternative damages model.
The strategic discussions on this subject are almost always complicated and multilayered. Questions such as the following arise:
(a) Why have we spent $_____ and _____ months on this expert?
(b) Isn’t our expert more qualified?
(c) Won’t our expert be able to clear up the confusion about how this damages calculation is supposed to be analyzed?
(d) Is an all-or-nothing approach worth it?
(e) Will the trial judge pull the trigger, or are we destined for a lengthy appeal?
(f) What gives us the best chance to win?
Even though the answers to these questions may force you to lean toward calling the expert anyway, the abundant deficiencies in the damages evidence presented by EMC became the overriding factor, and the defendants’ counsel ultimately decided not to call its expert witness to testify about damages at trial.
Lower-Court Actions
At the conclusion of the jury trial, the court entered a judgment that included all of the jury’s damages awards, for a total amount in excess of $20 million. A devastating result—but the defendants’ counsel remained confident that the record was preserved and would reveal that there was legally insufficient evidence to support the damages awarded to EMC.
On appeal, the defendants sought a reversal of the judgment and requested that the appellate court render a take-nothing judgment against EMC because it failed to present any legally sufficient evidence of damages. The court of appeals largely affirmed the trial court’s judgment. However, the dissent recognized a path to overturning the award and lent at least some credence to the defendants’ position.
Next, the defendants petitioned for review and elevated their arguments to the Texas Supreme Court.
Review of the Legal Sufficiency of Expert Testimony
Courts evaluating the legal sufficiency of expert testimony “must ‘rigorously examine the validity of the facts and assumptions on which [expert] testimony is based.’” Hous. Unltd., Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820, 832 (Tex. 2014) (quoting Whirlpool Corp. v. Camacho, 298 S.W.3d 631, 637 (Tex. 2009)). Likewise, the expert’s “‘underlying data should be independently evaluated in determining if the opinion itself is reliable, . . . and ‘[i]t is incumbent on an expert to connect the data relied on and his or her opinion and to show how that data is valid support for the opinion reached.’” Mel Acres, 443 S.W.3d at 831 (quoting Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 713 (Tex. 1997); Camacho, 298 S.W.3d at 642). Expert testimony is conclusory or speculative, and thus legally insufficient evidence, when the expert fails to provide any explanation or predicate for her opinion; the explanation the expert provides for her opinion suffers from too great an “analytical gap”; and/or the expert’s opinion is predicated on facts, data, or assumptions that do not actually support the opinion or that are not supported by the evidence. See, e.g., City of San Antonio v. Pollock, 284 S.W.3d 809 (Tex. 2009); Mel Acres Ranch, 443 S.W.3d at 832–33, 835; Elizondo v. Krist, 415 S.W.3d 259 (Tex. 2013); City of Keller v. Wilson, 168 S.W.3d 802 (Tex. 2005).
When applying these principles to the expert testimony presented by EMC at trial, the defendants argued on appeal that EMC’s “expert” damages testimony was rife with analytical gaps and assumptions that were unsupported by, and contrary to, the evidence. The defendants further argued that the experts’ testimony did not come anywhere close to satisfying the standard of “reasonable certainty” required under Texas law.
In a lengthy, reasoned opinion, the Texas Supreme Court ultimately held that EMC failed to present legally sufficient evidence of damages, and it reversed the portion of the judgment awarding damages and rendered a take-nothing judgment. In so holding, the court found that there was no evidence of any damages because the testimony was conclusory.
The following excerpt demonstrates the extent of the analytical gap in the testimony of EMC’s experts:
Lygren based his EBITDA calculations on his conclusion that the Partnership’s sales would grow at an annual rate of 19% from 2012 to 2020. He testified this rate of increase was reasonable because (1) it was based on Pike’s projection of 2011 sales, and (2) CemPozz had a low market penetration rate, so there was significant upside potential. Defendants assert this sales growth rate cannot be reconciled with the facts, and Lygren failed to bridge the analytical gap between the facts on which he relied and his conclusion. We agree with defendants that Lygren’s testimony was legally insufficient based on an analytical gap between the data and his opinion. See Hous. Unlimited, Inc. Metal Processing v. Mel Acres Ranch, 443 S.W.3d 820, 835 (Tex. 2014).
Regarding Pike’s sales projection for 2011, Lygren failed to explain how it supported an annual 19% increase in sales through 2020. In 2006, the Partnership sold 81,402 tons of product. 2007 was its peak sales year at 91,639 tons. Its sales then decreased each year until 2010 (its last full year in business), when it sold 58,148 tons.
Pike projected an increase in sales to 86,293 tons in 2011. . . . Lygren did not explain how Pike’s 2011 projection of an increase in sales the year after a recession supported his conclusion that sales would continue to increase by 19% each year thereafter.
As for market penetration, Lygren did not explain how the Partnership would increase its penetration rate when it had been unable to do so in prior years. The market penetration rate of CemPozz was very low―around 1%. Pike testified regarding the Partnership’s lack of success with marketing and sales of CemPozz. He explained that penetrating the market was difficult because ready-mix concrete producers already had sources of products and were very comfortable with their current mix designs. Some producers were not even willing to test new products given the risk of having to fix faulty concrete slabs. Pike further explained that concrete producers evaluate a new product by comparing it to their existing products in terms of cost and results of 28-day strength tests. Producers concluded the strength-test results of CemPozz were not high enough to be competitive with their existing mixes even though CemPozz was less expensive. Pike testified that the Partnership tried to get producers to retest CemPozz after initial negative test results, but some would not and others retested but got the same results. Lygren did not address the reasons underlying the low market penetration rate, and his assumption that the Partnership’s sales would grow simply because they had room to grow is speculative on its face.
Pike, 610 S.W.3d at 788–89 (footnotes omitted).
The court went on to state that “hypothetical or hopeful” is not enough to meet the applicable standard for expert valuation testimony:
It is incumbent on an expert to connect the data relied on and his or her opinion and to show how that data is valid support for the opinion reached.” Whirlpool Corp. v. Camacho, 298 S.W.3d 631, 642 (Tex. 2009). Evidence of future income used to determine fair market value should not be “hypothetical or hopeful but substantial in the circumstances” and “based on objective facts, figures, or data.” Phillips v. Carlton Energy Grp., LLC, 475 S.W.3d 265, 279–80 (Tex. 2015). Further, an expert’s valuation must account for “basic marketplace realities”—here, the Partnership’s difficulty with marketing and its decreasing sales almost every year. See City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 184 (Tex. 2001).
Id. at 789.
Conclusion
After nearly a decade of litigation and appeals, the defendants’ counsel’s strategy to not call the defendants’ own expert witness at trial was vindicated. If the defendants’ expert witness had taken the stand, EMC’s counsel (having been made acutely aware of its evidentiary deficiencies during the directed verdict argument) could have used the defendants’ expert to attempt to cure the deficiencies or to present a new, alternative theory to support the recovery of damages. Without the defendants’ expert witness on the stand, no such option existed for EMC. Thus, even though the defendants could have called their expert witness to reveal additional holes in EMC’s damages model, keeping their expert witness off the witness stand proved to be the wiser course.
Lisa M. Norman is a shareholder and Ben Westcott is a comanaging shareholder with Andrews Myers, PC, in Houston, Texas.