business valuation expert witness in contract dispute caseThe U.S. District Court for the Eastern District of Louisiana heard arguments on a Motion in Limine filed by Plaintiff Franchise Services and an opposition filed by Defendant Café, which owns a restaurant concept and authorizes locations with franchise agreements.

Plaintiff and Defendant entered into the “Area Development Agreement” (“ADA”) in 2007, pursuant to which Plaintiff promised to pay Defendant $175,000 to open two of Defendant’s franchises in Georgia. The dispute in this case revolves around a single word in the agreement, which defines Plaintiff as the “Developer” and Defendant as the “Franchisor.” As written, the ADA obligated the Defendant—not the Plaintiff—to sell (or cause some third party to sell) a minimum number of franchise agreements. The court concluded as a matter of law that the word “Franchisor” in the ADA was a typo and thought that the contract would be absurd unless the parties intended that word to be “Developer,” such that Plaintiff, rather than the Defendant, had the obligation to sell the franchise agreements. The district court held that the parties had committed a “clear mutual error” and ordered the rescission of the contract. Plaintiff’s claims couldn’t proceed without an enforceable contract, so summary judgment for Defendant’s was granted.

After appeal and remand, Plaintiff filed a Motion in Limine to exclude Defendant’s proposed business valuation expert witness, proffering numerous arguments. The first of which was the expert’s reliability. This, the judge wrote, “is determined by assessing whether the reasoning or methodology underlying the testimony is scientifically valid,” and that a number of nonexclusive factors may be relevant to the reliability analysis. This includes: (1) whether the technique at issue has been tested; (2) whether the technique has been subjected to peer review and publication; (3) the potential error rate; (4) the existence and maintenance of standards controlling the technique’s operation; and (5) whether the technique is generally accepted in the relevant scientific community.

Initially, the court had to determine whether Defendant’s expert was qualified to offer expert testimony on the issues of breach of contract and damages in this case. On this point, Defendant noted that courts of this District have often allowed CPAs to give expert testimony about business valuations or damages calculations. Further, Defendant claimed that its expert was qualified to testify as an expert on business valuation. Defendant emphasized that an expert may testify about subjects outside his area of practice and that a lack of specialization affects only the weight of the expert’s testimony, not its admissibility. With respect to Defendant’s expert’s credentials, Defendant emphasized his 20 years of experience in business valuations, economic damage analysis, financial analysis, forecast and projections, forensic accounting, litigation support services, and strategic planning. The expert was also a CPA and had received accreditations in business valuation, financial forensics, and valuation analysis. Finally, Defendant pointed out that both parties’ experts have similar certifications and titles.

Citing Fifth Circuit precedent, the judge noted that “[a] lack of specialization should generally go to the weight of the evidence, rather than its admissibility.” As a result, an expert witness “is not strictly confined to his area of practice, but may testify concerning related applications; a lack of specialization does not affect the admissibility of the opinion, but only its weight.'” The judge held that Defendant’s expert was qualified to testify as an expert witness in the field of business valuation, as his qualifications “speak for themselves.”

Next, Plaintiff challenged the reliability of Defendant’s expert’s testimony, claiming that the testimony wasn’t based on reliable principles and methods and raised whether the expert’s testimony was supported by sufficient facts or data. The judge stated that expert testimony is not based on sufficient facts or data when it lacks an evidentiary basis or factual support. However, “questions relating to the bases and sources of an expert’s opinion affect the weight to be assigned that opinion rather than its admissibility and should be left for the jury’s consideration,” the judge wrote, quoting the Fifth Circuit. In light of this, the court found that Defendant’s expert’s testimony was based on sufficient facts or data. Any argument about the bases and sources of Defendant’s expert’s opinion could be explored through cross-examination.

Plaintiff also claimed that Defendant’s expert’s report was unreliable because it consisted solely of subjects that he could use to cross-examine Plaintiff’s expert. Further, Plaintiff argued that the Court couldn’t determine whether Defendant’s expert’s methods were reliable because the report didn’t identify or explain any methods. The judge acknowledged that courts of this District recognized the inexactitude of business valuation determinations. “Business valuations methods are not exact and are basically guides used by buyers and sellers in an effort to determine what would be the fair market value for a given business. Given the dynamics of businesses and business practices, and factoring in circumstance[s] that may be unique to the parties, an inflexible formula for determining loss of value would be impracticable,” the judge explained, citing a 1996 decision. The three recognized business valuation methods are (1) the income-based approach, (2) the market-based approach, and (3) the asset-based approach. Plaintiff’s expert’s report seems to use the market-based approach, “i.e., value based on comparison to comparable businesses existing in the particular market adjusted for the individual characteristics and risks associated with the specific business.” In this instance, the judge held that Defendant’s expert’s report, which called Plaintiff’s expert’s report into question, could be said to use the same methodology.

Finally, Plaintiff claimed that Defendant’s expert’s opinion was irrelevant because he merely questioned Plaintiff’s expert’s opinion—without offering an opinion of his own. Plaintiff contended that the jury could decide whether to accept Plaintiff’s expert’s testimony based on his answers to direct and cross-examination, without needing to hear Defendant’s expert’s testimony discrediting Plaintiff’s expert’s methodology. However, the judge stated that business valuation is not a common-sense subject that a jury member could evaluate based on his own common experience and knowledge. Therefore, the Court held that Defendant’s expert’s testimony would assist the trier of fact to determine whether to accept Plaintiff’s expert’s opinion on damage calculations.

Plaintiff’s Motion in Limine was denied.

 

 

Spencer Franchise Services of Georgia v. Wow Café, 2016 U.S. Dist. LEXIS 50919 (E.D. La. April 15, 2016)