Accounting Expert Witness Testimony Found to Lack Understanding of the Type of Business at Issue

James Swain Rieves, who operated Platinum Vapor, LLC, doing business as Cloud 9 Hemp faced legal trouble when the Town of Smyrna Police Department (hereinafter “SPD”) discovered the sale of Cannabidiol (CBD) products by the business in May 2017. The Smyrna Police Department
raided Cloud 9’s premises and seized tens of thousands of dollars in
inventory, along with other items. Despite the clear legality of industrial hemp products, including CBD, under Tennessee law, the SPD continued its investigation yet both Rutherford County and the Town of Smyrna failed to investigate the case during the four months and eighteen days they possessed the materials seized from CLOUD 9. This prolonged scrutiny caused significant harm to Rieves’ business, leading to severe emotional distress, loss of enjoyment of life, and a substantial decline in Cloud 9’s income. The reputation of the business and Rieves himself suffered irreparable damage during this ordeal.

The Plaintiff, James Swain Rieves, enlisted the services of CPA Tom Price, an expert in damages and business valuation, to assess the financial impact on his business resulting from the events in question. The Defendants, Town of Smyrna, did not dispute the admissibility of Price’s opinions outlined in the Price Report. However, they countered the same with their own expert, CPA Robert Vance, who is a highly skilled forensic economist retained to challenge the foundations of Price’s conclusions and provide an alternative assessment of the Plaintiff’s damages. Rieves did not contest Vance’s qualifications or the relevance of his opinion but questioned the reliability of Vance’s conclusions as presented in the Vance Report.

The Vance Report comprised two main sections. The first section critiqued the opinions presented in the Price Report, while the second section contained Vance’s own “Damage Calculation.” The Plaintiff raised objections to three opinions expressed by Vance in his critique of the Price Report, seeking their exclusion as unreliable. These included Vance’s assertions that Price’s calculations were unreliable due to the use of “national level statistics” which were applied to the Plaintiff’s “small, local CBD store and his online business”; that the Price Report failed to consider the lack of capital and credit in the damages analysis; and that it overlooked competition from local retail establishments in Smyrna and the potential impact of “big box” stores entering the CBD market when computing damages. Additionally, the Plaintiff contested Vance’s own damages calculation.

Accounting Expert Witness

Robert Vance is a highly skilled forensic CPA and forensic economist based in Memphis, Tennessee. His professional focus lies in various areas including business valuation, divorce litigation support, commercial lost profits, personal injury economic damage calculations, forensic investigations, and expert witness testimony. He earned his Bachelor of Science in Business Administration in Accounting from the University of Tennessee in 1985. With a wealth of credentials, Robert holds designations as a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), Certified in Financial Forensics (CFF), Certified Valuation Analyst (CVA), and Certified Financial Planner (CFP). Robert is the principal of Forensic & Valuation Services, PLC in Memphis, Tennessee.

Discussion by the Court

The Plaintiff contested Vance’s opinions on Price’s valuations, asserting that Vance failed to provide any reliable data sources to support his views. Instead, Vance relied on snippets from five online news articles, none of which claimed scholarly status or cited legitimate data sources. Furthermore, the Plaintiff argued that Vance’s opinions were flawed, as he mistakenly believed Rieves’ business was a “brick-and-mortar, local, storefront retailer” of CBD products, whereas it functioned as a manufacturer, wholesaler, and online retailer. Additionally, Vance erroneously assumed the business was primarily sold locally, whereas Rieves testified in his deposition, quoted by Vance himself, that only a small percentage of sales were to Tennessee residents. Based on these discrepancies, the Plaintiff contended that Vance’s opinion, suggesting a comparison to local retail businesses, lacked support from the record or the documents Vance relied upon and was not sufficiently reliable for jury consideration.

The Court determined that Vance’s fundamental misconception of Rieves’ business as a small brick-and-mortar store with some online presence undermined and rendered his critiques of Price’s analysis unreliable. Vance’s mischaracterization of the business demonstrated a lack of understanding of its nature, customer base, and actual competitors. Specifically, Vance questioned Price’s analysis, citing differences between the “micro-level environment for small retail stores” and the “macro-level sales considerations of manufacturers of CBD products.” However, the Court noted that Rieves’ business was not a small retail store but, in fact, a manufacturer. 

Furthermore, the Plaintiff highlighted that Vance’s citation of an article to support his claim that such types of establishments operate in different environments was merely an online piece by a “startup consultant.” This article broadly outlined “5 variables every business owner should pay attention to,” including competition, political climate, the economy, trends, and technology. The Plaintiff also noted that Vance criticized Price’s growth projections as “miraculous” without providing a basis for such criticism. Interestingly, one of the articles Vance cited referred to a “recent study out of Boulder, Colorado,” estimating a tenfold increase in the market for CBD products in the next five years. 

Vance criticized the Price Report for purportedly neglecting to factor in competition in the area in his damages analysis. The Plaintiff testified that his business had minimal dependence on local establishments, with a very small percentage of sales coming from Tennessee. Additionally, Vance listed 52 retail establishments in Smyrna selling CBD products but failed to specify whether these were preexisting competitors or new entrants into the market. 

The Plaintiff raised objections to Vance’s criticism of Price, claiming a failure to consider Mr. Rieves’ lack of capital and credit in the damages analysis. Vance supported this critique by citing an online article from CNBC.com outlining common reasons for small business failure, including “empty pockets” due to “poor cash flow.” However, the Plaintiff argued that Vance overlooked the alleged cause of Rieves’ cash flow and credit issues, claiming they have stemmed directly from the Defendants’ seizure of assets and shuttering his business twice. Additionally, the Plaintiff noted that the cited article lacked scholarly credibility and did not conduct any specific analysis to support Vance’s assertions. 

The Court concluded that all of Vance’s critiques of Price’s analysis were deemed unreliable and inadmissible. This decision stemmed from Vance’s mischaracterization or misunderstanding of the business type involved and his reliance on non-scholarly and only tangentially relevant online articles. The Court also deemed these articles inadmissible. Importantly, it was emphasized that Vance’s critiques, largely based on common sense, did not necessitate an expert to cross-examine Price regarding perceived inadequacies and oversights in his opinions. 

Vance presented his own valuation of the Plaintiff’s damages, relying on an analysis of the business’s actual income and expenses for eight months leading up to the initial seizure in September 2017. However, Vance used income figures from only the three months preceding the seizure to project future earnings and calculate “alleged damages” over a 25-month period, aligning with the Tom Price report spanning from September 2017 through September 2019. His analysis assumed no business growth over time due to factors such as a negative trendline, lack of capital, and increased competition. Vance also explained why he discounted the Plaintiff’s $91,000 claim for damages resulting from the seizure of inventory and materials, deeming it as double-dipping. According to Vance, the total damages arising from the Defendants’ actions amounted to $319,380, a considerable difference from Price’s assessment of total lost income at the “gross profit level,” ranging between $1.27 million and $2.33 million.

The Plaintiff sought to exclude Vance’s damages calculation, deeming it unreliable. This objection arose from Vance’s use of only eight months of data, despite the Plaintiff’s yearly earnings being available since 2015. This approach led to Vance basing projections on a negative growth trend for the months of July through September 2017, instead of utilizing yearly earnings or even earnings for the entire eight months he purported to have reviewed that could have shown an upward trend. The Plaintiff also criticized the Vance Report for neglecting to consider significant market growth for CBD products, failing to analyze the impact of increased competition, and not providing an explanation for how low capital, combined with these factors, would have hindered the Plaintiff’s business growth over the next 25 months.

The Court determined that the Plaintiff’s critiques of Vance’s damage calculation were more relevant to their weight rather than their admissibility. Citing In re Scrap Metal Antitrust Litig., 527 F.3d 517, the Court emphasized that the rejection of expert testimony is the exception rather than the rule. The traditional and appropriate means of challenging such evidence involve vigorous cross-examination, presenting contrary evidence, and providing careful instruction on the burden of proof. In Vance’s case, his damage calculation relied on data supplied by the Plaintiff and mathematical equations based on that data. His assumptions projecting no growth for the Plaintiff’s business were based on his own observation of the trendline for the Plaintiff’s business for the last three months for which data were available. 

The Court concluded that the Plaintiff’s challenges to Vance’s damage calculation were more about their weight than their admissibility. The jury would not be presented with inaccurate facts but rather with a calculation based on assumptions that the jury may or may not agree with. Consequently, the motion to completely exclude Vance’s damage calculation was denied.

Held

The Court granted in part and denied in part the Plaintiff’s Motion in Limine to Exclude Expert Testimony of Defendants’ Retained Expert Robert Vance. The motion against Vance was granted to exclude the opinions presented in the first part of the Vance Report critiquing the Price Report and to exclude the five articles cited in support of those opinions. However, the motion was denied in so far as it sought to exclude Vance’s calculation of the Plaintiff’s damages.

The Court has not arrived on an outcome for this case since the remaining issues involved in this case still await resolution.

Key Takeaways

The Court granted the motion to exclude opinions presented by expert Robert Vance, critiquing the analysis of another expert, Tom Price. Vance’s mischaracterization of Rieves’ business type and reliance on non-scholarly articles led the Court to deem his critiques unreliable and inadmissible. The Court emphasized that rejecting expert testimony constituted an exception and directed that Vance’s damages calculation, while subject to challenges about its weight, was ultimately considered admissible, rooted in observable facts and data. This case underscores the importance of a thorough and accurate understanding of the type of business at issue when presenting expert opinions and the need for a reasonable factual basis in damages calculations.

Case Details

Case Caption	Rieves v. Town of Smyrna
Docket Number	3:18cv965
Court	United States District Court, Tennessee Middle
Citation	2024 U.S. Dist. LEXIS 18626
Order Date	February 2, 2024