Accounting ExpertA plaintiff and the State of Delaware brought suit under the state’s False Claims and Reporting Act, alleging that the defendant gift card services company, its successor-in-interest, and several retailer parties entered into a contractual scheme designed to deprive Delaware of millions of dollars in unclaimed gift card balances to which it was lawfully entitled under the state’s Abandoned and Unclaimed Property Law.

Judge Paul R. Wallace wrote that Delaware Rule of Evidence 702 is substantially similar to Rule 702 of the Federal Rules of Evidence, which is governed by Daubert and Kumho Tire, and that the Delaware Supreme Court has expressly adopted the holdings in those decisions. Consistent with Daubert, Wallace noted that Delaware requires the trial judge to engage a five-step test to determine the admissibility of expert testimony. The trial judge must determine that:

(1) the witness is qualified as an expert by knowledge, skill experience, training or education;

(2) the evidence is relevant;

(3) the expert’s opinion is based upon information reasonably relied upon by experts in the particular field;

(4) the expert testimony will assist the trier of fact to understand the evidence or to determine a fact in issue; and

(5) the expert testimony will not create unfair prejudice or confuse or mislead the jury.

Plaintiffs offered their accounting expert whose opinions were intended to elucidate the “economic reality” of the gift card company’s business arrangement. Defendants moved to exclude the expert’s opinions, arguing that he lacked sufficient qualifications, opined on proposed accounting entries without evidence that the entries were ever implemented, and expressed opinions that failed to meet the standard for reliability. Defendants also argued that the expert shouldn’t be allowed to comment on their expert’s rebuttal report at trial.

Plaintiffs’ accounting expert was a CPA who worked as an accountant and auditor for more than 18 years. He specialized in forensic accounting and litigation support services for more than 14 years. He was currently employed as a partner in an accounting firm. Defendants disputed the validity of the expert’s qualifications, arguing that he lacked unclaimed property experience sufficient to form an opinion. Plaintiffs countered that the application of unclaimed property laws to unused gift balances wasn’t a distinct area of accounting, and that the expert’s certifications as a CPA and in the field of financial forensics showed that he had the specialized knowledge required to testify as an expert.

Judge Wallace felt that a CPA typically possesses the “specialized knowledge” to qualify as a helpful expert witness under the proper circumstances. Here, his experience as an auditor of companies with gift card programs equipped him with enough expertise to testify regarding the gift card company’s proposed accounting entries, the judge held.

Defendants next argued that the accounting expert’s opinions lacked relevancy, as they were based on proposed accounting entries, and he cited no evidence that the proposals were actually implemented. Plaintiffs contended that Defendants misconstrued the purpose of the proposed accounting entries—the expert didn’t opine on the proposals for the purpose of showing that Defendants actually used them, but rather to show that the proposals put Defendants on notice of inconsistencies with the Card Services Agreements, thereby undermining Defendants’ good faith argument.

The accounting expert purported to compare the proposed accounting entries with the actual economic arrangement between the gift card company and the Defendants, as determined through discovery. The disparity between the accounting arrangement in the proposed entries and what was actually used was relevant to the issue of scienter, Judge Wallace explained. The fact that the proposed accounting entries weren’t implemented could be used by Defendants to attack the weight of the evidence at trial. However, because Plaintiffs didn’t assert that Defendants implemented or considered implementing the proposals, merely that the Defendants received and saw the proposals, the judge found the expert’s opinions on the proposed accounting entries relevant.

Defendants then claimed the expert’s opinions were based upon neither information relied upon by experts in the field, nor a reliable methodology. They asserted that he failed to cite to any accepted accounting authority or standard in his opinions, and thus hadn’t relied on any objective standard. Defendants further asserted that the expert’s reliance on “true economic reality” failed to satisfy the Daubert factors for establishing reliability. Plaintiffs said that “true economic reality” isn’t a technical term—but plain English—and therefore, a sufficiently reliable basis for his opinion that the Defendants’ actual arrangement with the gift card company didn’t match the proposed accounting entries.

Defendants did acknowledge that there were no GAAP provisions specific to gift card accounting, but criticized the expert’s reliance on non-binding accounting guidance (the Statement of Financial Accounting Concepts, distributed by the Financial Accounting Standards Board (“FASCON”)). However, Judge Wallace found that, in the absence of GAAP provisions on point, the expert’s reliance on FASCON in conjunction with his specialized knowledge as a CPA rendered his opinions sufficiently reliable.

Finally, Defendants argued that the accounting expert should be precluded from opining on opinions expressed in the rebuttal reports of certain Defendants’ experts because he has testified that, having reviewed the rebuttal reports, there was nothing in his own report or testimony that he wanted to amend. Plaintiffs argued that the expert may attempt to rebut criticism of his report raised by Defendants’ experts, and that the schedule didn’t provide for sur-rebuttal expert reports.

The scope of a rebuttal is limited to the same subject matter encompassed in the opposing party’s expert report, the judge noted, quoting an earlier case. The opposing experts, therefore, hadn’t raised anything outside the scope of the accounting expert’s initial report. The expert himself already testified that there was nothing in his report he would change in light of Defendants’ experts’ opinions. As such, no sur-rebuttal was necessary, the judge held.

Defendants’ Daubert motion to exclude or limit the expert testimony of the accounting expert was denied, but he was precluded from providing sur-rebuttal testimony at trial with the matter being heard outside the jury’s presence and based on the trial record.

 

State ex rel. French v. Card Compliant, LLC,2018 Del. Super. LEXIS 380 (Del. Sup. Ct. August 29, 2018)