Lost On Lost Profits Testimony

In setting aside a damage award based on error in admitting testimony regarding the plaintiff's lost profits, circuit notes that whether admitted as lay or expert evidence, the testimony reflected a "critical flaw" in logic and methodology and was simply "too speculative and conjectural", in Gallagher & Co. v. Babcock, __ F.3d __ (5th Cir. Dec. 18, 2012) (No. 11-30452)

Often the burden of deciding whether to use an expert or lay witness seems to outweigh the question of what the witness's evidence is intended to prove. A recent example of this problem was considered by the Fifth Circuit where the proffered testimony, whether lay or expert, apparently was too speculative for admission.

In the case, plaintiff Gallagher, a firm that handled employee-benefit insurance programs, purchased Defendant Babcock, a consulting insurance brokerage. As part of the deal, the defendant -- and others from his enterprise, signed an alleged agreement not to compete. However, with the Gallagher's assumption of Babcock's business after the purchase, some of the Babcock employees left for employment with a competitor, Ellsworth. Allegedly the former employees , took thirteen Gallagher clients who had previously been clients of the now-defunct Babcock organization.

Plaintiff Gallagher sought an injunction to enforce terms of the agreement and ultimately succeeded in getting the trial judge to grant judgment as a matter of law on the breach of the non-competition provisions of the agreement. The trial judge then submitted the issue of damages to a jury, which ultimately awarded $1.2 million to plaintiff. This was less that the evidence the defendant provided of the lost profits. Defendants appealed, contending in part that the court erroneously admitted certain testimony about the plaintiff's alleged damages.

In their appeal, the defendants cited as error the admission of testimony by plaintiff's witness Caraher, who happened to be the "chief financial officer" of the plaintiff. The witness provided two different estimates of the amount it would take "to put the plaintiff in the same economic position it would have been in" had the agreement been fulfilled. While the court admitted Caraher's testimony as an expert "in the field of accounting, it noted as well that he could "testify as a fact witness" since he apparently had "valued the business." Gallagher, __ F.3d at __.

The circuit summarized the basis for the damage calculations made by the witness. However, it noted a "critical flaw" in the witness's methodology, which rendered its admission erroneous. The circuit observed that the witness's testimony amounted to projecting the plaintiff's lost-profits from the loss of business suffered from:

clients who left [plaintiff] ... after the breach. The problem is that the group of clients who chose to leave is not the same as the group of clients who followed Defendants to [competing firm] Ellsworth. Of the nineteen clients who left [plaintiff] GBSI, only thirteen followed Defendants.

Plaintiffs contend that Defendants' breach caused the six remaining clients to depart, and that Defendants are therefore responsible for [plaintiff] GBSI's loss of their business. Plaintiffs hypothesize, for example, that the specter of litigation attending Defendants' breach spooked their otherwise loyal customers. This is too speculative and conjectural to support an award of damages. Caraher testified that GBSI expects to lose clients every year, and provided no specific evidence regarding why these six clients decided to go to a new broker after Defendants' departure.
Gallagher, __ F.3d at __.

The problem with the testimony by the plaintiff's chief financial officer was not that it was improper expert or lay testimony. What ever it was, it was not relevant. As explained by the circuit, its premises misconceived the nature of the case as well as the types of damages caused:

Defendants did not breach their agreements by leaving GBSI, but by accepting work from clients who departed along with them. Because Defendants are not responsible for GBSI's other lost clients, we hold that the district court abused its discretion by permitting [plaintiff chief financial officer] Caraher to testify about an irrelevant theory of damages. We therefore vacate the $1.2 million damages award [determined by the jury] and remand to the district court for further proceedings.
Gallagher, __ F.3d at __ (emphasis as in original).

As Gallagher suggests, an important aspect of any witness's testimony is the soundness of the premises on which the opinion is based, regardless of whether the testimony is in the nature of expert or lay testimony. As noted by the Fifth Circuit, this in large part involves a question of relevance.


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