Even Ibbotson can be challenged by aggressive defense counsel

The related Metro Tech cases show how far opposing counsel will go to discredit the testimony of a financial expert.

In this case, the plaintiff, a Puerto Rico corporation that specializes in laboratory calibration and preventive maintenance services, contracted with the defendant to conduct the necessary assessments to certify the plaintiff as ISO 17025 compliant. The parties’ relationship deteriorated due to payment and certification delays, eventually resulting in a breach of contract suit. The plaintiff alleged approximately $35.6 million in economic losses, including lost profits and lost goodwill, and the matter proceeded to trial.

Of most interest to BVR customers, the defendant also moved to disqualify the plaintiff’s damages expert under Daubert. The expert was a Ph.D. who’d taught international trade and economics courses at the university level since 1977. The expert had also worked at several economist forecasting firms and written a chapter on Puerto Rico economy for a United Nations publication. He’d served as an expert witness in 22 prior cases, but had never calculated economic damages for a plaintiff corporation.

The defendant claimed these qualifications did not satisfy Daubert. The expert had never published any papers on business valuation techniques, valuation of economic damages, lost profits, “or any other relevant area.”  He had never taught any courses on valuing economic losses and this was the first time he’d applied any method to assess a company’s lost profits.

Nevertheless, the court qualified the expert. An expert with appropriate credentials and an appropriate foundation for his opinion “must be” permitted to testify if his evidence will tend to make the existence of any material fact more or less probable than it would be without the testimony, it said. The expert’s testimony would aid the jury to determine the proper level of damages should they find for the plaintiff.

Ibbotson data not peer-reviewed? The defendant also claimed the expert’s methodology was unreliable. In essence, his damages calculations consisted of three steps: 1) deciding the plaintiff’s confirmed lost business; 2) deciding its lost deals, which he equated with losing the business (and all its potential profits); and 3) using business valuation techniques that required applying multipliers from Ibbotson’s Cost of Capital 2008 Yearbook. The expert did not know whether this methodology has been subject to peer review or publication, the defendant argued. He did not know its potential rate of error, or whether the method for quantifying damages was generally accepted by the economic and legal community. Finally, he did not verify that he applied the Ibbotson multipliers from different SIC codes correctly, and his overall calculations failed to analyze such information as costs, expenses, cash flow, and book value of comparable companies.

The plaintiff countered that—even though it was the expert’s first time using the Ibbotson price/sales equity valuation ratio to calculated damages, other experts have used this method in prior cases and published court opinions. The plaintiff also said that Dr. Ibbotson’s work has been published and subject to peer review (although the court opinion does not set forth any citations.) Further, the expert reviewed extensive regional data pertaining to each area of claimed damages and confirmed lost quotes and business contacts that arose from the cancelled IBII contract, and “followed Ibbotson methodology to calculate damages,” the plaintiff said. For example, for damages related to lost opportunities in the Dominican Republic, he divided the claim into two parts: the first relating specifically to the loss of the IBII contract ($1.8 million), and the second relating to lost quotes from other contacts, to which he applied the Ibbotson ratio.

The court considered the alleged weakness of the evidence, and found they were better suited to cross-examination at trial and consideration by the jury. Accordingly, it denied the Daubert motion and permitted the expert to testify to the damages claims remaining after summary judgment.

Metro Tech Corp. v. TUV Rheinland of N.A., 2010 WL 4117123 (D. Puerto Rico.)(Oct. 18, 2010); and Metro Tech Corp. v. TUV Rheinland of N.A., 2010 WL 4117115 (D. Puerto Rico.)(Oct. 18, 2010)