Causation is a critical element of damages, and it has a tendency to stump experts, who may rely on the plaintiff to link its losses to the defendant’s conduct. A recent Daubert case shows the risk of an expert’s assuming too much and scrutinizing the client’s narrative too little.

‘Luster effect’: The plaintiff sued the defendants, the seller and manufacturer of a heavy-duty truck crane, over defects related to the crane’s engine and other components. Ultimately, the crane failed inspections and became unusable. The plaintiff asked for lost profits and offered testimony from a damages expert, which the defendants challenged under Daubert.

The expert was a veteran CPA with a deep knowledge of the construction industry. He said he determined the plaintiff suffered a loss in gross revenue because of the problems with the crane. A comparison of the plaintiff’s total revenue generated in the six-month period preceding the delivery of the crane with the revenue generated in the subsequent six months, when the crane was performing well, showed that the plaintiff generated some $325,000 in additional revenue. He noted that the company’s overall revenue continued to increase through February 2013, but it “dropped precipitously for the period of March 2013 through July 2013.”

To explain the drop, he adopted the luster effect theory the company’s owner developed. Having the crane gave luster to the company in the marketplace and increased revenue. Once the crane became unusable, the luster and the extra revenue went away. In other words, there was a direct connection between the availability of the crane and the company’s revenue. The expert admitted that he did not independently verify the causation narrative. Nor did he explore other reasons for the increase and decrease in the plaintiff’s revenues. The only actual data he used for his analysis was financial data he had obtained from the company.

The court agreed with the defendants that the expert’s finding was inadmissible. “Pinning the company’s overall financial performance on the Crane, untethered from any data or methodology that provides insight into [the company’s] actual rental experience with it and its other cranes, is speculative.” The expert failed to gather anecdotal evidence supporting the luster effect claim. He also failed to break out data as to the revenue the plaintiff was able to generate when the crane was in service and the expenses related to the crane’s use. And he failed to research the market for the particular crane model to determine what the rate of demand for it actually was.

Takeaway: As an expert, don’t assume there is a causal connection because the client or the client’s attorney says so. If you don’t test the story for holes, the other side will.

Find an extended discussion of American Aerial Services v. Terex United States, 2015 U.S. Dist. LEXIS 55997 (April 29, 2015), in the July edition of Business Valuation Update; the court’s opinion will be available soon at BVLaw.