A lawyer loses credibility when one expert’s methods undermine another financial analyst's damages calculation

MyGallons LLC v. U.S. Bankcorp, 2013 U.S. App. LEXIS 11004 (May 31, 2013)

MyGallons launched a prepaid consumer gas program in June 2008.  The program used U.S. Bankcorp's payment network which was accepted by 95% of the country’s service stations.  This network was specifically mentioned in MyGallons' launch, which helped the new program receive wide media coverage. Within days, over 6,000 members signed up, and 25,000 more attempted to.

A day later, in response to media inquiries, the defendants publicly stated that they had no agreements or ongoing negotiations with the MyGallon. As a result, the plaintiff received an “F” rating from the region’s Better Business Bureau and faced accusations on the Internet that it was running a “scam.” It stopped accepting new members and refunded monies it had collected from existing ones. (In early July, the defendants issued a retraction.)

In August, the plaintiff sued and presented two experts. The first, and most critical, expert was a professor of marketing who taught courses in advertising, marketing research, digital marketing and consumer behavior. She admitted that she had no sales forecasting expertise and that “sales [are] not used as an effectiveness measure of advertising efforts or spending.” But she believed she was qualified to testify because of her expertise in “communication effectiveness or persuasion with purchase intent.”

She used a “funnel approach” to project the plaintiff’s future membership and profits. Starting with the market’s overall size, she used factors such as persons aware of the company’s brand, traffic to its website, actual signups, and a projected growth rate and attrition to narrow it to actual memberships. She benchmarked the plaintiff’s growth against some of the most successful companies in the industry, including Apple, Costco, and Netflix, but failed to include startup companies among the comparables. She concluded that over a three-year period, beginning on July 1, 2008, the plaintiff could have signed up about 3.3 million members.

The second expert was a CPA. He relied on the first expert’s membership projections to determine that the plaintiff had suffered $208 million in lost profits.  But, the federal district court dismissed most of the plaintiff’s claims and ultimately, the jury awarded the plaintiff $4 million in damages.

The defendants attacked this verdict in post-trial motions on matters of law.   The court confirmed a reasonable jury could have concluded that the defendants’ statements made it impossible for the plaintiff “to secure an alternative card processing network, which, in turn, caused the company to suffer pecuniary loss.”  It also stated, however, that a $4 million award for general damages alone would be excessive considering the plaintiff’s “relatively short existence.”

Expert ‘ignored business realities.’ Subsequently, the defendants challenged the verdict with the Fourth Circuit Court of Appeals. First, they argued that the $4 million award for reputational harm to a fledgling company that announced itself to the public only a few days before the defamation would be “so exorbitant as to shock the sense of the court.”   The Court of Appeals noted the extensive media attention the plaintiff’s startup announcement generated (and the approximately 30,000 individuals who enrolled or tried to enroll) but it agreed that this was a “nascent company with no capital, no financing, no customers who had yet used its planned consumer programs, and no profit.” Accordingly, there was no justification for millions of dollars in reputational damage.

A second challenge to causation was rejected by the appeals court, which observed there was a “wave of bad press” and evidence that alternative payment networks refused to work with the plaintiff as a consequence. A reasonable jury could draw a reasonable inference of causation, the court concluded.

First expert's business testimony misses the mark. Finally, the defendants argued the marketing expert was unqualified to render an opinion as she lacked experience in forecasting sales and used an “overly optimistic and flawed method” to project membership. What’s more, without her testimony, the damage expert’s calculation lacked a proper basis and was also inadmissible.

While the Court of Appeals did not disqualify the marketing expert, it found her methodology and conclusions unsound. She used only “industry giants” as benchmarks without considering whether the company had the resources, financing, or experience necessary to ensure that degree of growth or “indeed, even as necessary to carry out its own business plan.” She also failed to take into account “real circumstances” that affected the plan’s viability--in a “puzzling omission,” the appellate court said, the expert failed to consider what would happen if gas prices dropped. The expert’s projections “ignored business realities and relied on sheer speculation,” the appellate court concluded.

Because the CPA's $208 million lost profits determination hinged on the excludable testimony, it, too, was speculative and inadmissible. In sum, the Court of Appeals said, the $4 million award was excessive if it constituted only general damages and it was based on unreliable evidence if it represented some combination of general and special damages. For these reasons, the appellate court ordered a new trial on damages.