Two economic experts’ opinions on lost profits in suit against former employee were challenged by defense. The testimony was deemed allowable by the court.
Facts: This case (Quantum Fitness Corporation et al v. Cybex International Inc. et al – United States District Court – Southern District of Texas – September 16th, 2015) involves a breach of contract of a former employee. Kyle Smith worked at Quantum, a business that manufactures and sells commercial fitness equipment, from March 2001 to March 2012. The plaintiff contends that Mr. Smith diverted sales prospects to his new employer, Comm-Fit, before he resigned from his position at Quantum. In order to prove their case, the plaintiff hired two business expert witnesses, specifically on lost business value.
Alice Hilton, one of the experts hire by the plaintiff prepared a lost profits analysis opinion. She stated that new construction of commercial and residential facilities are a driving force for Quantum’s direct sales. As the number of new facilities increase, so does Quantum’s business. She based her analysis of future lost profits for new building permits for multi-family homes in Harris County, Texas, allowing for a one year lag time between obtaining a permit and the construction of the building.. In addition, she stated that after Mr. Smith left Quantum, their direct sales declined while there was a growth in new permits Her calculations of future lost profits from March 2012 to December 31st, 2014 totaled $7,150,000. Ron Hancock provided a “Reasonable Test-Lost Value of Direct Sales Business Segment”, in which he stated that the lost value of their direct sales business was $7,970,000.
The defendants filed motions to exclude the report and testimony of these expert witnesses, based on an issue they had with the correlation between Quantum’s direct sales and the number of permits issued to multi-family buildings in Harris County. They state that 1) a large number of Quantum’s sales took place outside of Harris County; 2) A majority of sales were not to customers of multi-family dwellings; 3) The one-year lag time theory provided by Alice Hilton is not supported by reliable data; and 4) The permit data Hilton uses does not represent the amount of multi-family homes. In addition, they challenge the lost business analysis provided by Ron Hancock on similar grounds.
Discussion: The court, in it’s decision, stated that the complaints by the defense related to the correlation between Quantum’s direct sales and the number of permits issued is not sufficient enough to exclude the testimony of Alice Hilton. Her analysis of historical and direct sales and the number of permits issued in Harris County was statistically significant are enough to support the “rate of error” factors in a Daubert challenge. In addition, the court noted that the statistics provided by Hilton are not used to prove causation (that Smith’s actions caused Quantum’s damages), but only offered to quantify the damages
As to the argument as to what the permit data shows (whether it truly represented the amount of multi-family homes), the court opined that this goes to the weight of the argument and not it’s reliability. Last, the one-year lag time is sufficiently factual and methodological to support the conclusions.
Held: The motions to exclude the expert opinions of Alice Hilton and Ron Hancock were denied.