Experts as “Mouthpieces” Are Not Experts at All

The Importance of Being Truly Independent

The rise of Daubert challenges to valuation experts has resulted in more than just the exclusions of valuation experts. When an expert is excluded for “subjective belief” and “unsupported speculation” by the court, a closer examination into such commentary made by courts reveals the increasingly problematic trend of experts failing to perform independent analyses.

The rise of Daubert challenges to valuation experts has resulted in more than just the exclusions of valuation experts. When an expert is excluded for “subjective belief” and “unsupported speculation” by the court, a closer examination into such commentary made by courts reveals the increasingly problematic trend of experts failing to perform independent analyses (Orthoflex, Inc. v. Thermotek, Inc., 2013 U.S. Dist. LEXIS 174670 (Dec. 10, 2013)).  Highlighting when the court used an unapologetic tone regarding an expert’s inadequate analysis is a 2013 lost profits case, when it agreed with the defendant that the plaintiff’s expert was acting as a “mouthpiece” and ruled to exclude the expert (Marine Travelift, Inc. v. Marine Lift Systems, Inc., 2013 U.S. Dist. LEXIS 91268 (June 28, 2013)). While the rise in such commentary against experts is unsettling, it is the underlying actions of the excluded experts that speak volumes about egregious, superfluous, and counterproductive roles in litigation.

Daubert Challenges to Financial and Valuation Experts 

For an overview of Daubert challenges, PricewaterhouseCoopers’ most recent Daubert Challenges to Financial Experts study provides an interesting and timely analysis. From 2012 to 2013, the total of number of financial expert witness Daubert challenges in the federal jurisdictions declined from 192 to 175.  The most recent exclusion rate (in whole or in part) of 41 percent, is lower than 2012’s 45 percent exclusion rate, but still in-line with the historical average of 46 percent exclusion rate since 2000.  The Second Circuit not only hears the highest number of Daubert challenges, its exclusion rate tops the Federal Circuit average.  The Second Circuit had 227 challenges from 2000 through 2013, and reported 116 exclusions in whole or in part, resulting in a 51 percent rate of exclusion.  In 2013, lack of reliability continued to be the top reason why financial experts were excluded across the Federal Circuit.

Closer to Home

Although the ill-prepared “mouthpiece” expert originated in Wisconsin federal court, such expert actions are prevalent in the Northeast districts as well. In a Massachusetts case where the expert “relied primarily on the shareholders’ subjective opinions of the company’s value… (and) on revenue forecasts generated by the company that were, in fact, wildly optimistic and dramatically overstated,” it was found that his opinion failed to meet AICPA valuation standards (Finnegan et al v. Baker et al, Mass. Superior Court Civil Action No. 09-3772-BLS1).   In a Maine case, an expert’s testimony on projections was excluded because he “arrived at these sales figures based entirely on…subjective expectations” provided by the Plaintiff (Downeast Ventures Ltd. v. Washington County, 2007 WL 67988, Page 3 (D. Me. 2007), Not Reported in F.Supp.2d (2007). In other words, reliance solely on the Plaintiff for data is not only problematic, it can be cause for exclusion.

Experts must demonstrate thorough and independent vetting of facts and data. This threshold is not met even if the plaintiff-provided data is from the owner of the business or a source that has other established ties to the business. A New York court excluded an expert where most of the information underlying his business damages analyses came to him from the company’s president and was filled with untested assumptions (Imaging International v. Hell Graphic Systems, Inc., and Linotype-Hell Company, 2007 N.Y. Slip Op 52120(U) [Misc 3d 1123(A)] LEXIS 7368). A Maine court excluded an expert who relied solely on a member of the executive board for: “the ultimate source for the figures” in his projection model; the major assumptions and key variables selected; and “a single phone conversation…that lasted approximately thirty minutes” (Clifford, et al v. Case, et al, Docket No.: CV-07-03, Page 13 (West Bath, Me. July 18, 2008). Finally, the Second Circuit has ruled that “the entrepreneur’s ‘cheerful prognostications’ are not enough” for an expert to rely on (Celebrity Cruises, Id. (quoting Schonfeld v. Hilliard), 218 F.3d 164, 173 (2d Cir. 2000)).

Relying on outside sources is not an adequate solution and faces similar hurdles. In fact, experts’ reliance on projections prepared by third parties is subject to the same level of understanding, scrutiny, and vetting. With respect to the expert excluded in the Clifford case in Maine, the court further commented that the expert had failed to independently determine if “the numbers supplied…were grounded in anything other than mere speculation.” Similarly, the Third Circuit excluded expert testimony where the expert failed to understand the methodology and to conduct an independent analysis of a marketing projection prepared by a third party (Chemipal Ltd. V. Slim-Fast Nutritional Foods Intern, Inc. 350 F. Supp 2d 582, 588 (D. Del. 2004); see also Steyck. V. Bell Helicopter Textron, Inc., 295 F. 3d 408, 414 (3^rd Cir. 2002)).

Facing a lack of evidence is not an excuse for an expert to “turn….subjective expectations into evidence merely by calling the expectations reasonable based on” the expert’s “own, albeit considerable, experience in the accounting field” (Downeast Ventures Ltd. v. Washington County, 2007 WL 67988, Page 3 (D. Me. 2007), Not Reported in F.Supp.2d (2007)). Maine courts have repeatedly articulated the unacceptable nature of basing evidence on experience, rather than facts and data, as was evident in Clifford. Management’s representations may not be an adequate substitute for evidence, but neither is ipse dixit, or when an expert takes something they said and asserts it as fact.

Counterproductive 

As these examples highlight, an expert’s opinion is not always left to the weight of their testimony, and lack of evidentiary foundation, including relying on management—or attorney—provided facts, can lead to exclusions. More importantly, acting as a mere mouthpiece serves to reinforce the growing opinion that financial or valuation experts who do so serve an unnecessary, costly, and unhelpful role in litigation. The essential role that an expert can bring to a litigation case cannot be understated. However, it is not just the expert’s responsibility to provide relevant and reliable testimony. Attorneys must use experts as a crucial tool to build their case argument, and refrain from using an expert in a redundant, obstructive manner simply meant to parrot an interpretation of unsubstantiated facts or evidence.

Laura Pfeiffenberger, MBA. MSA, is a Director in the Business Valuation and Litigation Support Group at Meyers, Harrison & Pia, LLC, based in Portland, ME. She has significant experience in matters involving economic damages, including the determination of damages related to contracts, torts, infringement of intellectual property, personal injury/wrongful termination, post-acquisition disputes, and shareholder disputes. Ms. Pfeiffenberger has also performed valuations of business interests for a variety of purposes, including estate and gift tax matters, transactions, and litigation. Ms. Pfeiffenberger can be reached at Lpfeiffenbeger@mhpbv.com or at (207) 775-5111.