Court admitted the valuation expert reports presented by both parties in this case involving the termination of a wine distributorship agreement
Posted on September 21, 2023 by ewp_staff_writer
This case involved a dispute between Ste. Michelle Wine Estates, LLC (Plaintiff) and Tri County Wholesale Distributors, Inc. (Defendant) over the value of brands that Defendant had previously distributed for Plaintiff. The parties had a distribution agreement that was governed by the Ohio Alcoholic Beverages Franchise Act. This Act allowed a manufacturer like Plaintiff to terminate a distribution agreement upon a “change in control” over the manufacturer, but required the manufacturer to compensate the distributor for the diminished value from the loss of brands.
A change in control occurred with Plaintiff, and Plaintiff terminated the agreement with Defendant on December 28, 2021. The parties attempted to negotiate the diminished value but were unsuccessful. Plaintiff then filed this lawsuit seeking a judicial determination of the diminished value. The Court entered an interim order requiring Plaintiff to pay Defendant $112,500 based on Plaintiff’s last good faith offer. That Order is subject to a final determination by Court, which will be made following a bench trial.
Both parties retained experts to assess the diminished value. Plaintiff moved to exclude the report and testimony of Defendant’s business valuation expert witness, Edward “Ted” B. Wardell, while Defendant in turn moved to exclude certain opinions of Plaintiff’s business valuation expert witness, Justin L. Cherfoli. The Court denied both motions.
Business Valuation Expert Witnesses
Justin Cherfoli is a Managing Director in the valuation disputes practice and serves as the national practice leader for the firm’s Valuation Disputes/Family Law group. He has extensive experience as an expert witness and consultant in various financial matters, including business valuation, economic damages, and forensic accounting. His work has covered a wide range of purposes, including marital dissolutions, shareholder disputes, commercial litigation, estate and gift taxation, financing, purchase and sale advisement, intellectual property valuations, reasonable compensation, and other tax, corporate, and litigation-related matters. Additionally, he serves as a court-appointed or mutually agreed-upon financial expert in shareholder disputes and divorce matters. Prior to his current role at Stout Risius Ross, a leading global advisory firm, Justin worked with Ernst & Young, LLP, in its Assurance and Advisory Business Services Group in Detroit.
Ted Wardell is a Certified Valuation Analyst (CVA), awarded by the National Association of Certified Valuation Analysts (NACVA). Wardell also brings 27 years of beverage industry experience to Ippolito Christon as the former owner operator of Point Pleasant Distributors, a 2.6mm case SABMiller/HUSA/Diageo distributor on the coast of central New Jersey. Through operating Point Pleasant Distributors, Wardell gained experience with business planning, improving operations, increasing cash flow and ROI, integrating merged distributors, and ultimately selling a distributorship. He has specific expertise in the financial and operational aspects of running a beverage distribution company. Wardell complemented his industry experience with formal education, including an Executive MBA in Finance from Rutgers University and a BA in Economics from the University of Pennsylvania.
Discussions by the Court
The Court first discussed Plaintiff’s motion to exclude the expert report and testimony of Ted Wardell. Plaintiff argued that Wardell’s valuation improperly included 2022 profits, violating Sixth Circuit precedent that a distributor cannot retain profits for a year if the valuation also includes lost profits for that same year. Wardell’s December 2021 valuation did not account for profits Defendant earned in 2022 from distributing Plaintiff’s brands after termination was announced. Plaintiff argued the Court could not simply deduct the 2022 profits, as the deduction would need to be adjusted to present value.
Defendant countered that excluding 2022 profits was a legal issue, not a valuation issue, so it was not Wardell’s role to decide. Defendant argued that if the Court determined 2022 profits should be excluded, the Court could readily perform that calculation. Plaintiff asserted Wardell should not be permitted to alter his valuation methodology at this late stage of the litigation.
Regarding Wardell’s inclusion of 2022 profits in his 2021 valuation, the Court found wholesale exclusion was not required. The Court was aware of the Sixth Circuit precedent barring inclusion of post-termination profits when valuation included projected lost profits as was established in Tri County Wholesale Distributors, Inc. v. Labatt USA Operating Co. Moreover, the Court found these issues went to the weight, not admissibility, of Wardell’s opinions, especially in a bench trial. The Court could properly weigh Wardell’s opinions with full knowledge of the relevant case law. If the Court found Wardell’s opinions inconsistent with the law, it could assign little or no weight.
Plaintiff argued that Wardell ignored the Sixth Circuit precedent which required using the average industry capital structure in the valuation, citing the Tri County case. Defendant countered that Tri County is not controlling and had no collateral estoppel effect as it was based on specific facts and did not mandate using the industry average capital structure.
The Court agreed with Defendant’s position on this issue. The Court found that Tri County did not require using the average industry capital structure, since that case involved the beer industry and made a fact-specific determination of capital structure. The Sixth Circuit simply held that the district court did not “clearly err” in how it determined capital structure in that particular case. The Court rejected any argument of collateral estoppel that would bind Defendant to use the industry average capital structure based on Tri County.
Excluding Defendant’s expert entirely for not using the industry average capital structure would essentially decide the case in Plaintiff’s favor. The Court found this drastic outcome is not warranted under Tri County. Ultimately, the capital structure issue represents a battle of the experts that the Court as trier of fact is equipped to resolve at trial. The Court declined to impose an industry average requirement based on Tri County, finding Defendant is not bound to use that capital structure method.
The Court then discussed Plaintiff’s argument that Wardell just adopted marginal cost data from Defendant’s counsel. Marginal costs represent the “avoided costs” that a distributor would not incur without distributing certain brands. The lower the avoided costs, the higher the diminished value. Plaintiff argued Wardell should be precluded from testifying because he relied on marginal cost data provided by Defendant’s counsel rather than verifying the data himself. Wardell acknowledged the cost information from counsel seemed higher than expected. Plaintiff asserted an expert cannot simply offer counsel’s opinion as his own, so Wardell’s testimony should be excluded. Defendant noted that by relying on the data it provided, Wardell used higher avoided costs, resulting in a lower diminished value valuation that benefits plaintiff.
The Court again found wholesale exclusion was not required, as diminished value involved several calculations. Even if the Court found Wardell’s report unreliable on avoided costs, it need not reject the whole report. The Court would be better positioned at trial to assess the reliability of the avoided costs analysis.
Plaintiff argued that Wardell failed to comply with Rule 26(a)(2)(B) since a list of all of the cases in which he testified in the prior four years was not provided to the Court, nor was the compensation he was being paid for this case articulated. Defendant held it to be a moot point considering the relevant information regarding Wardell had been disclosed to the Plaintiff since then. The Court held that exclusion was not warranted on that basis.
As for the Defendant’s motion to exclude certain opinions of the Justin Cherfoli, Defendant contended that Cherfoli’s analysis relied on what they described as “made up” data when assessing avoided costs and asserted that Cherfoli improperly incorporated fixed costs into his calculations. In response, Plaintiff stated that the data provided by the Defendant was insufficient and incomplete for conducting a proper evaluation of avoided costs. Plaintiff argued that Cherfoli’s expert opinion was grounded in his extensive experience.
The Court first addressed the argument that Cherfoli relied on “made up” avoided costs data. The Court again found it could properly assess the reliability of the data at trial, so exclusion was not required. The Court also found it could determine if Cherfoli improperly included fixed costs, and reject that testimony after trial if needed. The Court observed that Defendant’s arguments went to weight rather than admissibility.
In conclusion, the Court denied both motions to exclude expert testimony, finding the most of the issues identified went to the weight of the testimony rather than admissibility. With a bench trial, the Court was confident it could properly evaluate the expert opinions. The Court’s stance on the bench trial remains to be seen.
The key takeaways with respect to expert witness testimony were:
- The Court found most of the challenged aspects of the expert reports and testimony went to the weight of the evidence rather than admissibility. The Court was confident it could properly weigh the expert opinions at trial.
- Issues like reliance on potentially unreliable data, failure to comply with disclosure requirements, and methodological deficiencies were found to impact weight rather than require outright exclusion in the instant case.
- The Court was unwilling to exclude expert testimony entirely based on isolated deficiencies in the analysis. Only if the core of the expert’s opinion was deemed unreliable would exclusion be warranted.
- The Court deferred some of the key challenges to expert methodology until trial, finding the context of the trial testimony would allow the Court to better evaluate reliability.
In summary, the Court emphasized its role as the trier of fact in a bench trial and expressed confidence in its ability to properly weigh even questionable expert opinions based on the trial evidence. Daubert was deemed to be less of a concern when the trial judge was the trier of fact.
Posted In: Business Valuation Expert Witness, Expert Challenges
Tagged In: Daubert Standard, Expert Testimony, expert witness, Rule 26, Termination, Valuation