“Unexplained” Methodology employed by Accounting Expert Witness passes Daubert Test after Court notes that merits and drawbacks of the Methodology have been discussed

Plaintiffs BRP Colleague Inc. (“BRP Colleague”) and Baldwin Krystyn Sherman Partners, LLC (“BKS”) jointly referred to as “BRP,” had initiated legal proceedings against Defendants Edward (Teddy) Gillen (“Gillen”) and Edgewood Partners Insurance Center Inc. (“EPIC”) concerning Gillen’s prior association with BRP and his subsequent employment with EPIC, a direct competitor of BRP. BRP (together with BRP Group, Inc. and its affiliated entities, collectively “BRP Group”) offers insurance, benefits, and risk management solutions for individuals and businesses across the country, with a particular focus in the Southeast. EPIC is a direct competitor of BRP. It is an insurance brokerage and consulting firm selling property and casualty insurance, employee benefits insurance and specialty program insurance, including medical malpractice insurance.

The basis of BRP’s claims revolved around alleged violations by Gillen of the Defend Trade Secrets Act, the Georgia Trade Secrets Act, and tortious interference with contractual and business relationships. The focal point was Gillen’s departure from BRP and his purported violation of a legally binding and enforceable restrictive covenant agreement known as the Employee Covenant Agreement (“Agreement”). Plaintiffs also claimed that EPIC had tortiously interfered with contract, business relationships, and expectancies by unlawfully taking Plaintiffs’ business for itself (and Gillen) after Plaintiffs rejected EPIC’s attempt to purchase Plaintiffs’ business. Plaintiffs sought attorney’s fees from both Gillen and EPIC.  

Gillen, a former insurance producer for BRP specializing in the sale of medical malpractice insurance policies, was accused of breaching various legal obligations and engaging in actions detrimental to BRP’s interests. Notably, BRP contended that Gillen misappropriated confidential and proprietary information, including trade secrets, during his tenure with BRP. This misappropriation was alleged to have been utilized by Gillen to illicitly solicit and service BRP’s customers on behalf of, and to the advantage of, EPIC, his current employer.

The crux of the matter lay in Gillen’s alleged theft of confidential and proprietary information, constituting trade secrets, and the subsequent utilization of these unlawfully obtained assets to serve EPIC’s interests. BRP contended that Gillen, in defiance of his restrictive covenants and applicable laws, had engaged in the solicitation and servicing of BRP’s clients for EPIC’s benefit.  

EPIC, according to BRP’s assertions, was not a passive beneficiary of Gillen’s actions but actively participated in and facilitated the breach of Gillen’s legal obligations to BRP. BRP accused EPIC of knowingly benefiting from Gillen’s illicit conduct and further asserted that EPIC conspired with Gillen to undermine BRP’s contractual, statutory, and common law rights. This ongoing wrongful conduct by the Defendants, BRP argued, had resulted in irreparable harm and substantial damages to BRP.

In response to the alleged misconduct, BRP sought both preliminary and permanent injunctive relief to halt and prevent the continued harm arising from the Defendants’ actions. Additionally, BRP sought monetary damages and other available relief as a remedy for the harm caused by Gillen and EPIC’s wrongful conduct. 

The financial aspects of the case involved BRP’s claims for lost profits and unjust enrichment damages against the Defendants. BRP, supported by expert witnesses Joseph J. Egan and Myles D. Kaluzna, estimated its lost profits (both past and future) to amount to $991,755. Furthermore, BRP’s economics experts opined that EPIC had been unjustly enriched by $710,528 through its wrongful acts. Notably, Defendants had engaged J. Lester Alexander III (“Alexander”) to counter BRP’s expert report, suggesting a contested battleground over the quantification of damages.

Plaintiff filed an initial motion to exclude the testimony of J. Lester Alexander III which was dismissed without prejudice by the Court on account of noncompliance with the local rules. After the Plaintiff’s re-filed the motion as per the Court’s directions, the Court addressed Plaintiffs’ Motion to Exclude Expert Report and Opinions of Alexander, which sought the exclusion of Defendants’ rebuttal damages expert, Alexander, under Federal Rule of Evidence 702 and Daubert. Plaintiffs asserted two primary reasons for the exclusion: first, that Alexander’s opinions were grounded in speculation and an unexplained methodology, and second, that his testimony would not contribute to the jury’s understanding of the evidence. 

Accounting Expert Witness

J. Lester Alexander III B.S., C.P.A., C.F.E. is the Executive Vice President of J.S. Held LLC. He has served as the Founder and Chief Executive Officer of AEA Group. He is a former partner of PwC and the former southeastern practice leader of one of its legacy firm’s consulting practices. Alexander practiced for more than three decades, performing audit, tax, and consulting services. In recent years, he concentrated his practice in the areas of economic research, financial investigations, forensic accounting, and valuation services. He had been admitted as an expert witness and testified in Federal and state courts on a variety of financial subjects.

Discussions by the Court

In response to the motion to exclude Alexander’s testimony, the Court had engaged in a comprehensive analysis of the admissibility of expert testimony, applying the standards set forth in Federal Rule of Evidence 702 and the Daubert framework. The Court had begun by outlining the criteria for admitting expert testimony under Rule 702, emphasizing that an expert’s testimony should assist the trier of fact in understanding the evidence or determining a factual issue. 

The Court had acknowledged that Rule 702 required that expert testimony be based on sufficient facts or data, be the product of reliable principles and methods, and that the expert had reliably applied those principles and methods to the facts of the case. The Court then had turned to the Eleventh Circuit’s three-part test, as articulated in City of Tuscaloosa v. Harcros Chemicals, Inc., 158 F.3d 548, 562 (11th Cir. 1998), which mandated that the expert must be qualified, the methodology must be sufficiently reliable, and the testimony must assist the trier of fact in understanding the evidence or determining a fact in issue. Plaintiffs alleged that Alexander’s testimony was inadmissible under both the second and the third elements of the Harcos Chemicals test.

The Plaintiff argued that Alexander’s testimony regarding the methodology he allegedly employed in preparing his calculation of Plaintiffs’ lost profits manifested his repeated reliance on his subjective viewpoint under the cloak of purported reliance on industry standards and publications. For instance, Alexander’s report and calculation of lost profits were based on the presumption that economic damages cannot exceed the total value of the lost business, but when asked to explain the basis for this assertion, he failed to cite a source. Although he mentioned publications like “Valuation Services Practice A for Lost Profits 2020” and the “Litigation Handbook” as supporting his methods, he did not specify which parts of those publications supported the propriety of his method.

Due to his failure to cite all the sources he used, show his calculations, or even remember the numbers he used to calculate his final figures, Alexander’s findings were impossible to duplicate, confirm, or refute.

Alexander engaged in speculation when calculating Plaintiffs’ lost profits. In reaching his final damages conclusion, Alexander multiplied Plaintiffs’ total 2021 lost revenue by a revenue multiple of 2.03 without providing support for the assertion that the revenue multiple was more reliable than other methods of calculating damages.

Furthermore, Alexander chose his revenue multiple by taking the median revenue multiple
of four transactions he pulled from DealStats. One of the four transactions is from the Pittsburgh
market, while the other three are from Florida. With no analysis or investigation for this assertion,
Alexander stated that the Atlanta and Pittsburgh markets were on par “from the point of view of
profitability of an insurance agency.”

The Plaintiffs noted Alexander’s reliance on alleged comparable transactions to calculate the revenue multiple without articulating a basis for his subjective definition of a comparable transaction. Alexander failed to adequately respond when confronted with the ways in which his transactions substantively differed from the business at issue in this case.

The Plaintiffs further accused Alexander of failing to seek out and rely on relevant data, instead making unfounded assumptions. The Plaintiffs asserted this speculative approach rendered Alexander’s methodology unreliable.

Finally, the Plaintiffs contended Alexander’s flawed methodology would not help the jury assess the validity of the Plaintiffs’ expert’s calculations. Rather, they argued his testimony would confuse the issues and prejudice the Plaintiffs by providing a veneer of expertise without a sound analytical basis.

In response, the Defendants argued Alexander’s methodology was reliable and his testimony would aid the jury. They stated Alexander relied on established principles of valuation science and damages calculation. The Defendants stated that any questions regarding the credibility of Alexander’s methodology were reserved for the jury. The Defendants further argued Alexander’s decades of experience in the industry provided a sufficient basis for his choices.

The Court agreed with the Defendants and denied the motion to exclude. It found Alexander sufficiently explained his methodology during his deposition. The Court held that while Plaintiffs’ selected quotes arguably implicated Alexander’s credibility as a witness, the context of those quotes demonstrated that Alexander’s testimony was based on more than mere speculation.

Specifically, the Court noted Alexander based his opinions on his professional training and 2006 American Institute of Certified Public Accountants’ Guide, not just common sense. It also observed Alexander used a different methodology than the Plaintiffs’ expert, calculating damages using a market-based approach instead of an income-based approach. The Court stated Alexander extensively discussed his techniques in his deposition.

The Court concluded Alexander’s methodology was sufficiently reliable under Daubert. It also found Alexander’s testimony would be relevant in assessing damages, meeting Rule 702’s low bar for assisting the trier of fact. 

Held

The Court denied Plaintiffs’ Motion to Exclude Expert Report and Opinions of Defendant’s expert, J. Lester Alexander, III. 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 found that Alexander was sufficiently qualified based on his training and experience as an accountant. His methodology of using a market-based approach to calculate damages was deemed reliable, even if it differed from the Plaintiff’s expert’s income-based approach.
• The Court determined that Alexander’s testimony regarding damages calculations would be helpful to the jury in understanding the evidence and determining facts at issue in the case. Therefore, it met the relatively low threshold for relevance and assisting the trier of fact.
• While the Plaintiffs argued Alexander’s opinions were speculative, the Court found in the full context of his deposition he provided adequate explanation of his methodology grounded in accounting standards and training. Questions about his credibility were for the jury.
• The Court denied the motion to exclude Alexander’s testimony, finding it met the qualifications, reliability, and helpfulness requirements for expert testimony under Rule 702 and Daubert. This provides a good overview of how courts assess expert witness admissibility.