A federal court in South Dakota recently denied a motion to exclude a truck dealer’s expert testimony in a dispute over lost profits resulting from the termination of a distributor agreement. The defendants, a manufacturer and a trailer sales company, moved to exclude the testimony of an expert the plaintiff dealer had retained to testify as to its lost profits resulting from the termination.
Dealer filed a lawsuit alleging multiple causes of action, including breach of contract, breach of good faith and fair dealing, and tortious interference with a business relationship. Manufacturer entered into a written distributor agreement with Dealer in 2012, granting Dealer the right to franchise and distribute Manufacturer product throughout western South Dakota and parts of Nebraska. A new contract term would renew yearly on January 1, unless either party modified or non-renewed the current agreement.
In June 2013, Manufacturer sent proposed distributor agreement modifications to Dealer and also sent Dealer an email stating that it wouldn’t accept any orders placed by Dealer until the new agreement was signed. Dealer sent its own proposed modifications to Manufacturer a month later, including the right to sell all Manufacturer products instead of the two products authorized under the existing agreement. The letter also stated its intention to file a civil lawsuit against Manufacturer if the new terms weren’t met.
Dealer alleged that Manufacturer’s June 2013 email was a wrongful termination of the agreement, and that Dealer incurred damages it otherwise wouldn’t have but for Manufacturer’s non-renewal of the agreement. The dispute was over whether the agreement was terminated within the first nine months of contract, or non-renewed after 15 months on December 31, 2013. Regardless, Dealer stated it only sold Manufacturer trailers for nine months.
Dealer retained an expert to provide testimony on his assessment of Dealer’ lost profits and provided Defendants with his supplemental expert report. In reaching his ultimate conclusion, the expert considered multiple sources of data and information, and included the material he believed to be relevant.
U.S. District Judge Karen E. Schreier wrote in her opinion that despite the court’s wide discretion in determining an expert’s admissibility under Daubert—in the case of factual ambiguity—the expert is less likely to be excluded if the question of reliability would be better challenged on cross-examination. A challenge under Daubert doesn’t often result in the exclusion of experts because of factual flaws made in their opinion when their testimony would be probative to the jury and the issues in dispute can otherwise and expectedly be uncovered during trial.
Here, Defendants’ primary objections to the expert’s reliability as an expert stem from the allegations that his opinions “drastically overstated” Dealer’ lost profits by using numerically inaccurate data. While Defendants urged the court to exclude the expert’s testimony due to the alleged inaccuracy of the numbers and data used in calculating damages, Judge Schreier explained that the correctness of these figures was a question of fact, not law. Further, the expert specifically stated reasons for his estimations, so Defendants could challenge these deliberate choices on cross-examination.
While relevant sources of this data must be addressed by the court to some extent, Judge Schreier stated that ultimately, it’s for the jury to determine whether the numbers the expert used were correct. The court is to only evaluate whether Dealer laid the foundation for admissibility, which is to be determined through the examination of the expert’s methodology and his testimony’s ability to assist the trier of fact in understanding the complex nature of future profit-loss estimation.
Defendants attacked the expert’s “application of the wrong measure of damages,” arguing that Dealer’ burden for proffering lost profits is higher than usual based on the limited time Dealer was a Manufacturer dealer. However, Judge Schreier noted that there’s an important distinction between a business being considered new and a new business line. The Eighth Circuit, she explained, recognizes an increased standard for calculating reliable lost-profits when the former has recently been established, but only imposes this heavy burden after examining the distinctive facts of each case.
Here, the judge didn’t consider Dealer to be “new” to the business of selling and servicing trailers, even though it had just recently acquired the distributor agreement with Manufacturer. Dealer was well-established in the market, and thus significantly more stable in both operation and income than it would be if the agreement with Manufacturer had been its first or only distributorship.
The judge noted that the Eighth Circuit has held that the use of a 10-year projection period to determine lost profits incurred due to the unlawful termination of an exclusive dealership agreement, after a limited eight-month agreement period, was proper. As such, the expert’s opinion that “ten years is a very acceptable time period” wasn’t inappropriate. Defendants also challenged the data employed by the expert in “forecast[ing]” his total calculation of Dealer’ lost profits over this 10-year period. Judge Schreier held that these factual objections would be better addressed during cross-examination of the expert and left to the jury to allocate credibility and weight.
Here, Manufacturer’s objection wasn’t with the formula the expert used to calculate lost profits, but rather the original data applied to the formula. Judge Schreier said that because it is impossible to create a projected forecast without some degree of speculation, any factual objections are better left to the jury to determine. Manufacturer reasoned that the calculated lost profits reflect Dealer’ gross profits rather than net profits because the expert only included the cost of the trailers and employee sales commissions as mitigating variable expenses. The judge noted that the South Dakota Supreme Court found that damages are properly found when the “amount of net profits . . . plus the amount of fixed future overhead expenses” are measured. It’s the jury’s role to determine the weight to be given to the expert’s opinion, the judge said.
Finally, Defendants claimed that Dealer’ overhead charges were improperly omitted from the expert’s analysis. But the expert testified to his reasoning for not deducting overhead costs from the total damages calculation in his deposition: “If [Dealer] would have any material increase (of overhead) that would be variable . . . because of the sales of Manufacturer trailers . . . not just the general business, but actually related to that revenue, then those could be included. But my understanding is that there aren’t any, there wouldn’t be any.”
Again, the judge relied on a decision of the South Dakota Supreme Court, which held that a jury is “not to award the costs of fixed future overhead costs which . . . can [be] avoid[ed] by cutting costs or can apply to some other profitable use.” Here, the expert omitted overhead in his calculation of variable/avoided costs, but he also didn’t include overhead expenses as money Dealer was entitled to recover in his damages report. He testified that Dealer represented that it has a fixed overhead that wouldn’t be lowered, nor affected, by the loss of its product line. For this reason, Judge Schreier say that it follows that the expert didn’t find overhead to be a cost that needed to be included—either by subtracting from or adding to Dealer’ profits—as it was fixed within the company regardless of whether or not Dealer was licensed to sell Manufacturer trailers.
Legally, the judge explained that all that’s required to ensure proper methodology is “the utilization of the correct precedential formula, i.e., subtracting variable expenses from gross profits.” Because that was the methodology used, Judge Schreier found that the expert’s methodology was reliably sufficient and admissible as governed by Rule 702.