Portions of Expert’s Testimony Excluded Due to Insufficient Comparables and Unattributable Lost Profits

CDW LLC, CDW Direct LLC, et al. v. Netech Corporation

Civil Action No. 1:10-cv-00530

United States District Court, S.D. Indiana, Indianapolis Division: Opinion Delivered January 23, 2014

Plaintiffs CDW LLC, CDW Direct LLC, and Berbee Information Networks Corporation (collectively, “CDW”) brought a lawsuit in 2010 against Defendant NETech Corporation (“NETech”) asserting claims of tortious interference, breach of fiduciary duties, misappropriation of trade secrets, and unfair competition, stemming from employees who left CDW to work for NETech. CDW engaged an expert, Mark Hosfield, a financial consultant, Certified Public Accountant, and Certified Management Accountant to analyze its damages, including lost profits and future lost profits, based on NETech’s allegedly tortious conduct.

On the assumption that NETech is found liable to CDW for tortious conduct, Mr. Hosfield calculated the following damages to CDW: (1) lost profits of $4,960,859 through September 30, 2011; (2) future lost profits, made up of lost profits through 2015, and some indefinitely, in the amount of $13,804,701 (discounted to September 30, 2011); (3) recruiting, training, and marketing expenses of $577,055; (4) management time valued at $278,054 to control damage to the business; (5) increased compensation of $125,610 to certain individuals as a result of NETech’s actions; and (6) $178,687 in compensation and expense reimbursements to employees not faithfully working for CDW because of NETech’s actions.

NETech moved to exclude portions of Mr. Hosfield’s testimony based on Daubert v. Merrell Dow Pharm., 509 U.S. 579 (1993) and Federal Rule of Evidence 702, which require courts to determine whether expert testimony is relevant and reliable utilizing a three-step analysis: (1) determining whether the witness is qualified “as an expert by knowledge, skill, experience, training, or education”; (2) determining whether the expert’s reasoning or methodology underlying the testimony is scientifically reliable; and (3) determining whether the testimony assists the trier of fact to understand the evidence or determine a fact in issue. (Citing Ervin v. Johnson & Johnson, Inc., 492 F.3d 901, 904 (7th Cir. 2007) and quoting Fed. R. Evid. 702.)

Although the magistrate judge ruled that Mr. Hosfield’s compilation of revenue data from CDW’s accounting system did not pose admissibility problems because the data was sufficiently verified by Mr. Hosfield, the magistrate judge excluded certain portions of Mr. Hosfield’s testimony as insufficiently reliable under Daubert. Specifically, the magistrate judge concluded that Mr. Hosfield’s lost profits and future lost profits calculations, based on averaging the revenue growth of ten other CDW branches in the Great Lakes region, were insufficiently reliable under Daubert and, thus, excluded all of Mr. Hosfield’s opinions based on those calculations. The magistrate judge also excluded Mr. Hosfield’s testimony regarding customer revenue generated by the efforts of former CDW employees during their employment at NETech to the extent that Mr. Hosfield included revenue attributable to customers of CDW-Government (“CDW-G”), a non-party, sister company of CDW (i.e., CDW’s healthcare accounts) whose damages CDW cannot recover.

CDW objected to the magistrate judge’s rulings and order, which the district court judge overruled on the grounds that the magistrate judge’s rulings were neither erroneous nor contrary to law.

In affirming the magistrate judge’s exclusion of portions of Mr. Hosfield’s testimony on lost profits and future lost profits calculations based on averaging the revenue growth of other CDW branches in the Great Lakes region, the district court judge held that “[a]bsent the requisite showing of comparability, a damage model that predicts either the presence or absence of future profits is impermissibly speculative and conjectural. Of course, exact correlation is not necessary but the samples must be fair congeners. If they are not, the comparison is manifestly unreliable and cannot `logically advance a material aspect of the proposing party’s case.’” (Citations omitted.) The magistrate judge pointed to Mr. Hosfield’s failure to explain his choice of the other CDW offices as appropriate comparators to CDW’s Indianapolis office. CDW’s argument that the averaging of those offices was appropriate because of similarities in the geographic location, line of business, and that operation was under the same management structure and policy, was rejected because the similarities said nothing “about the market forces that affect (or affected) the revenues of any other branch and whether market forces affected Indianapolis even roughly the same as any other branch.”

In affirming the magistrate judge’s exclusion of portions of Mr. Hosfield’s testimony concerning lost profits attributable to customers of CDW-G, a sister company of CDW that is not a party to the litigation, the magistrate judge based her decision on the court’s previous finding that “a corporation does not ‘have independent standing to sue for injuries done to a sister or subsidiary corporation, despite the fact that their businesses are intertwined and the success of one is dependent on that of the other.’” (Citing Krier v. Vilione, 766 N.W. 2d 517, 525 (Wis. 2009).) The district court judge found no error in the well-reasoned conclusion by the magistrate judge.

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At Rosenfarb LLC we produce well-supported, well-reasoned and well-communicated damage calculations that withstand the rigors of litigation. We are a firm of forensic accounting and valuation experts. We understand business – including that different businesses are subject to different market forces – have keen insights and always connect the dots. We understand the litigation process – including whether non-litigants should impact any part of an expert’s analysis. We frame the issues simply and in alignment with the litigation strategy. We use logic to support our opinions, while creating compelling stories. We are sincere, professional and credible. We are accounting experts with legal acumen.

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