Insufficient Evidence and Defensible Opinions

Avoid Hypotheticals. But Remember: Experienced Experts Recognize that Limited Evidence Will Often Support a More Limited Opinion

Michael Kaplan explains how limited evidence can still support a limited opinion. Read about a valuator who had access to an insufficient number of documents and a hard cutoff date to complete a valuation by. Since the valuation was prepared in a manner that meets the professional standard of care, was generally in compliance with business valuation standards, and the expert’s approach and methodology was consistent with industry practice, the valuation stood up in court.

Seasoned experts recognize the warning signs and understand the risks of formulating opinions when they have not had access to sufficient underlying documentary evidence. Although experts provide counsel and clients with laundry lists of “necessary” documents, the documentation that is produced is often considerably less than ideal.  Follow up requests sometimes prove fruitful, but in many matters, discovery challenges, retaining counsel’s lack of appreciation of the expert’s evidentiary requirements, substandard document retention policies, chain of custody malfunctions, and cost constraints severely restrict the amount of evidence upon which an expert must rely in formulating his or her opinions.

It is not uncommon for counsel to encourage the expert to formulate opinions, notwithstanding the foundational gaps.  In the analysis underlying the expert opinions, an inexperienced expert might be persuaded to take risky leaps of faith that a more experienced expert would readily avoid.  The expert may be tempted to fill an unreasonable number of evidentiary gaps with assumptions.  At some point, however, filling too many evidentiary gaps with assumptions will render the expert’s opinions to be nothing more than hypothetical opinions. Hypotheticals, however, are easily impeached.

An experienced expert will typically choose a safer alternative. One alternative is to merely refuse to render an opinion. Refusing to render an opinion is likely to invite the wrath of retaining counsel and the client. Even though the expert’s election may be a defensible choice, the attorney may respond by initiating legal or regulatory action against the expert.  A second alternative may be to formulate an opinion, but insulate it with extensive disclaimer language.  This language, in all likelihood, will mitigate the impact of the opinion and perhaps taint the expert’s credibility.

There is a more creative approach that, in many matters, may be very effective.  Recognizing that the evidence is insufficient to support the opinions originally contemplated, an expert may want to evaluate the evidence and determine if there are any useful opinions that the evidence will support.  Many experienced experts recognize that limited evidence will often support a more limited opinion.

In a recent matter, an expert was retained to value a high-tech telemarketing company.   The company was formed by the defendants who were alleged to have “stolen” key technology from the plaintiff. The expert was retained by plaintiff’s counsel and was asked to value the patented technology, or in the alternative, the defendants’ company. The expert provided counsel, and counsel’s client, with a standard laundry list of documents and information that he needed to perform the engagement.  Some of the requested documents were in the possession of retaining counsel or the client.  Other documents would need to be obtained through discovery. The expert also informed counsel and the client of the amount of time that would be needed to complete the project, once the documents were delivered to the expert.  As is all too often the case, discovery efforts were resisted by the defendant, and the documents in the possession of retaining counsel or the client were significantly less complete than represented. As the cutoff date for expert reports quickly drew close, the expert realized that he would not be getting anywhere near the assortment of documentary evidence that he needed to formulate his opinion of the value of the technology or of the business.  In addition, retaining counsel informed the expert, notwithstanding the insufficiency of the documents, that the expert would need to complete his expert report by the cutoff date.

For some experts, this would be a difficult dilemma. But for this expert, the next steps were perfectly clear.  The expert first contacted retaining counsel, refreshed counsel’s memory as to the documents that were still outstanding, and reminded counsel that without these key documents, a valuation that would meet the professional standard of care could not be completed. The expert also advised counsel that he would review the evidence that he had and determine if he could still be helpful to the case.

The expert then spent the weekend inspecting each of the documents in the file with the objective of finding some piece(s) of evidence that would support the expert’s formulation of a meaningful opinion that would be favorable to the plaintiff’s case. The expert’s review of the documents proved fruitful, as in the file he found a written report of the valuation of the defendant’s company at an effective date, which was three months after filing the case.  In addition, a highly qualified, well-credentialed expert prepared the report. The expert also noted that the report appeared to be prepared in a manner that meets the professional standard of care, was generally  in compliance with business valuation standards, and that the expert’s approach and methodology were consistent with industry practice.

The expert, knowing that the available evidence would not enable him to formulate a defensible opinion of the value of the company, chose instead to formulate opinions about the earlier valuation and the valuator who prepared it.

The following summarizes the expert’s opinions:

1. Sufficient documents have not become available for me to formulate an affirmative valuation of XYZ Telecommunications Company.
2. XYZ Telecommunications Company was valued as of December 31, 2002 by Mr. Star Valuator.  As set forth in his report, he concludes that the value of XYZ Telecommunications Company was $1,477,000 as of December 31, 2002.
3. Mr. Valuator is a nationally recognized expert who holds three of the major credentials in business valuation.
4. Mr. Valuator’s work appears to be in general compliance with business valuation standards.
5. The approach and methodology that Mr. Valuator has applied are among the customary approaches and methodologies employed by business valuation experts.
6. I have no reason to believe that Mr. Star Valuator’s conclusion of value of XYZ Telecommunications Company of $1,477,000 is unreasonable.

Although the expert in this matter could not perform a business valuation of his own and offer an affirmative opinion of the value of XYZ Telecommunications Company, his leveraging of the report contained within the available evidence enabled him to present useful opinions for the trier of fact to consider.

It should be noted that opposing counsel responded to the expert’s work by bringing a Daubert motion. The court denied the motion.

Michael G. Kaplan, CPA, CVA, CFFA, is principal of Kaplan Abraham Burkert Associates in Los Angeles, CA where he provides litigation consulting and expert services. He is a frequent speaker at business valuation and litigation conferences. He is the president of NACVA’s Financial Forensics Institute and serves as lead instructor of NACVA’s boot camps and work- shops in litigation. He can be reached at (818) 888-0066 or by email at michael@kaplanforensics.com.   This article first appeared in the November/December 2010 issue of National Litigation Consultants’ Review.