AMY J. ST. EVE, District Judge.
Defendant Computer Sciences Corporation ("CSC") has filed a motion to exclude the expert testimony of Plaintiff System Development Integration, LLC's ("SDI") damages expert, Mr. Michael G. Mayer, pursuant Federal Rules of Evidence 702 and 403, and the Supreme Court's decision in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993).
For the following reasons, the Court grants the motion in part and denies it in part.
SDI filed suit against CSC, alleging breach of a subcontract agreement, tortious interference with prospective business advantage, breach of a fiduciary duty under a partnership agreement, quantum meruit, and equitable estoppel, all arising from CSC's alleged actions in replacing SDI with another company as a minority business partner under a contract with Exelon. (R. 83, Am. Compl., passim.) On September 13, 2010, 739 F.Supp.2d 1063 (N.D.Ill.2010) the Court granted CSC's motion for summary judgment with respect to all five claims and entered judgment in CSC's favor. (R. 109, Order.) On April 1, 2011, 2011 WL 1311903, the Court granted in part and denied in part SDI's motion to alter or amend the judgment after determining that CSC was not entitled to summary judgment on SDI's breach of subcontract agreement and quantum meruit claims. (R. 116, Order.) Those claims remain pending, and a jury trial is scheduled for September 10, 2012.
SDI intends to offer Mr. Mayer's testimony at trial. In his expert report, Mr. Mayer discloses three damages opinions: (1) damages for CSC's alleged breach of the partnership agreement; (2) damages for CSC's alleged breach of the subcontract agreement; and (3) quantum meruit damages. (R. 151-1, Expert Report of Michael G. Mayer, dated May 21, 2010 ("Mayer Report").) As explained in more detail below, CSC moves to exclude all of Mr. Mayer's opinions in this case. The parties did not depose Mr. Mayer, but the Court held a Daubert hearing on August 6, 2012, during which time the parties had the opportunity to conduct direct and cross examination.
"The admissibility of expert testimony is governed by Federal Rule of Evidence 702 and the Supreme Court's opinion in Daubert [.]" Lewis v. CITGO Petroleum Corp., 561 F.3d 698, 705 (7th Cir.2009). "The district court functions as a gatekeeper with respect to testimony proffered under Rule 702 to ensure that the testimony is sufficiently reliable to qualify for admission." Mihailovich v. Laatsch, 359 F.3d 892, 918 (7th Cir.2004) (citing Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999)); see also Lapsley v. Xtek, Inc., 689 F.3d 802, 810 (7th Cir.2012) ("The purpose of [the Daubert] inquiry is to vet the proposed testimony under Rule 702's requirements that it be `"based on sufficient facts or data,"' use `"reliable principles and methods,"' and `"reliably appl[y] the principles and methods to the facts of the case."'") (quoting Fed.R.Evid. 702). Whether to admit expert testimony rests within the discretion of the district court. See Gen. Elec. Co. v. Joiner, 522 U.S. 136, 118 S.Ct. 512, 139 L.Ed.2d 508 (1997); Lapsley, 689 F.3d at 810 ("we `give the district court wide latitude in performing its gate-keeping function and determining both how to measure the reliability of expert testimony and whether the testimony itself is reliable'") (quoting Bielskis v. Louisville Ladder, Inc., 663 F.3d 887, 894 (7th Cir.2011)).
Under Rule 702, "[a] witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if: (a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the expert has reliably applied the principles and methods to the facts of the case." Fed. R.Evid. 702; see also Ortiz v. City of Chicago, 656 F.3d 523, 526 (7th Cir.2011).
District courts employ a three-part analysis before admitting expert testimony: (1) the expert must be qualified as an expert by knowledge, skill, experience, training, or education; (2) the expert's reasoning or methodology underlying his testimony must be scientifically reliable; and (3) the expert's testimony must assist the trier of fact in understanding the evidence or to determine a factual issue. Myers v. Illinois Cent, R.R. Co., 629 F.3d 639, 644 (7th Cir.2010); see also Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 811-12 (7th Cir.2012). "The goal of Daubert is to assure that experts employ the same `intellectual rigor' in their courtroom testimony as would be employed by an expert in the relevant field." Jenkins v. Bartlett, 487 F.3d 482, 489 (7th Cir.2007) (quoting Kumho Tire Co., 526 U.S. at 152, 119 S.Ct. 1167).
Although CSC does not contend that Mr. Mayer is unqualified to testify as a damages expert in this case,
Mr. Mayer devotes eight pages of his twenty-page report to a discussion of the damages that SDI allegedly incurred as a result of CSC's breach of fiduciary duty under an alleged partnership agreement. (Mayer Report at 6-13.) On September 13, 2010, the Court granted summary judgment in favor of CSC on SDI's breach of fiduciary duty claim, determining that the parties never entered into a partnership agreement. (R. 109, Order.) The parties agree that Mr. Mayer's opinions regarding damages arising from
Mr. Mayer proffers two different quantum meruit damages opinions. First, he opines on what he terms "SDI's economic cost of providing benefits to CSC." (Mayer Report at 18.) Next, he offers an opinion on the "economic enrichment of CSC in receiving SDI's services." (Id. at 19.) CSC argues that Mr. Mayer's quantum meruit opinions are inadmissible because they do not comport with the measure of recovery for quantum meruit claims under Illinois law and because they are speculative and unreliable. For the reasons explained below, the Court excludes Mr. Mayer's quantum meruit damage opinions.
As the Court has previously explained, the "correct measure for quantum meruit recovery is the amount which the court considers defendant has been unjustly enriched at the expense of plaintiff," which is "generally the lower of these two: the economic cost to plaintiff of providing a benefit or the economic enrichment of defendant in receiving it." (R. 210, Aug. 3, 2012 Order at 15, 2012 WL 3204994 (citing Midcoast Aviation, Inc. v. Gen. Elec. Credit Corp., 907 F.2d 732, 745 (7th Cir. 1990)) (citations and internal quotation marks omitted).)
Mr. Mayer opines that SDI incurred economic costs in providing services to CSC in three ways. First, he states that SDI, at CSC's request, incurred cost in giving up the opportunity to partner with CSC's competitors. (Mayer Report at 18.) Second, he opines that SDI "used its relationships and goodwill to promote the CSC/SDI bid." (Id.) Third, he states that SDI "conducted bid and transition related work," including "recruiting 29 IT specialists for the contract, hosting CSC employees in its office space, and [conducting] transition related work such as field surveys of Exelon project sites." (Id. at 18-19.) He then opines that "SDI's economic cost is its lost profits multiplied by the likelihood that, as a result of bringing the contributions it made to the CSC/SDI bid to a competitor/SDI bid, the competitor/SDI bid would have won." (Id. at 19.) He states, as an example, that if the trier of fact "determines ... that there is a 50% likelihood that a competitor/SDI bid would win, the measure of damages would be SDI's incremental profits of $6,105,985 (5 years) to $8,203,525 (8 years) as calculated in section 6.1.2, [
It is appropriate to consider the benefit CSC retained from SDI's services in determining the measure of recovery under quantum meruit. See Midcoast, 907 F.2d at 744-45. Mr. Mayer's opinion regarding the economic enrichment that CSC received from SDI's services consists entirely of three sentences at the end of his report:
(Mayer Report 19.)
Mr. Mayer, however, provides no analysis, or citation to any reliable basis, in support of his opinion that, in the event the jury determines that CSC would not have won the Exelon Contract without SDI's services, SDI's damages include all of CSC's incremental profits under the Exelon contract.
Mr. Mayer opines that SDI's damages for breach of the subcontract agreement are its lost incremental profits. He uses a "standard" lost profits methodology to determine SDI's damages: "the present value of [SDI's] lost revenues under the Subcontract Agreement minus the incremental expenses that would have been required for SDI to realize such revenues." (Mayer Report at 3, 14.) Accordingly, his opinion consists of three sub-parts: (1) SDI's lost revenues under the subcontract agreement; (2) SDI's incremental expenses related to the subcontract agreement; and (3) present value discount rate. (Id. at 14.)
First, Mr. Mayer opines on the amount of SDI's base revenues for years one through eight of the subcontract agreement.
Second, Mr. Mayer opines on SDI's incremental expenses related to the subcontract agreement. He defines incremental expenses as those "that SDI would have incurred in order to provide the services to Exelon as outlined in the Subcontract Agreement between SDI and CSC." (Id. at 14.) Specifically, he opines that SDI's incremental expenses include
(Id. at 15 & Exs. 5.2, 5.3, 5.4.) Mr. Mayer derived SDI's expense figures from, among other sources, discussions with SDI personnel, SDI's financial statements, invoices, and expense figures from SDI's past projects.
Mr. Mayer also proffers an opinion on the present value discount. Mr. Mayer determines SDI's lost profits as of the anticipated date of trial, which, at the time Mr. Mayer issued his report, was October 2010.
Contract Term Present Value of Lost Profits 5 years $3,018,691 6 years $3,310,000 7 years $3,565,283 8 years $3,762,597
(Id.)
Additionally, Mr. Mayer cross-checks his opinions by performing a "reasonableness test," pursuant to which he compared his lost profits conclusions to three of SDI's other projects, which SDI asserts involve "similar, long-term computer-support services." (SDI's Opp. at 5.)
CSC argues that Mr. Mayer's breach of subcontract opinions are inadmissible for several reasons. First, it contends that Mr. Mayer relies on "unsupported and unfounded assumptions," including: (1) SDI was the sole reason that Exelon awarded the contract to CSC; (2) the Exelon contract would be extended past the initial five-year term; (3) SDI would have performed desktop services at a consistent level during the initial five year term and any extensions; (4) CSC's actions caused SDI's alleged harm; and (5) the profits under the Exelon contract, and SDI's entitlement to those profits. (SDI's Mot. at 6.) As a result, CSC submits, Mr. Mayer's opinions will not assist the trier of fact. (Id. at 11.) Second, CSC argues that Mr. Mayer's opinions must be excluded under the "new business rule." (Id. at 9-10.) Third, CSC challenges Mr. Mayer's present
An expert's testimony must rest on "sufficient facts or data." Bielskis, 663 F.3d at 895. The Court must be mindful, however, not to usurp the jury's role of determining the "soundness of the factual underpinnings of the expert's analysis and the correctness of the expert's conclusions based on that analysis." Id. at 896 (citing Smith v. Ford Motor Co., 215 F.3d 713, 718 (7th Cir.2000)); see also LG Elecs. U.S.A., Inc. v. Whirlpool Corp., No. 08 C 242, 2010 WL 3397358, at *6 (N.D.Ill. Aug. 24, 2010) ("`The soundness of the factual underpinnings of the expert's analysis and the correctness of the expert's conclusions based on that analysis are factual matters to be determined by the trier of fact...."') (quoting Smith, 215 F.3d at 718).
CSC's argument that Mr. Mayer inappropriately assumed the existence of an enforceable contract and that CSC's breach was the sole cause of SDI's damages is unpersuasive. (CSC's Mem. at 5 n. 3; CSC's Reply at 2.) It is entirely appropriate for a damages expert to assume liability for the purposes of his or her opinion. To hold otherwise would be illogical. See, e.g., In re Sulfuric Acid Antitrust Litig., 235 F.R.D. 646, 660 (N.D.Ill. 2006) ("A damages model would, of course, be necessarily consistent with liability, or necessarily assume liability.") (citing cases); accord Platypus Wear, Inc. v. Clarke Model & Co., Inc. No. 06-20976-CIV, 2008 WL 4533914, at *6 (S.D.Fla. Oct. 7, 2008) ("Ultimately, every expert witness who calculates damages sustained from a breach of a given contract must assume the contract's enforceability under the law. An accountant or forensic expert would not be expected or allowed to render an underlying legal opinion on that issue."). Mr. Mayer may not offer legal conclusions that a subcontract exists or that CSC breached the subcontract. Indeed, Mr. Mayer testified during the Daubert hearing that he was not offering an opinion as to the existence of a subcontract or whether CSC breached any such contract.
CSC's argument that the Court should exclude Mr. Mayer's opinion because it impermissibly assumes that "the Exelon Contract would be extended past the initial five (5) year term" and that SDI "would have performed [desktop side] services (at a consistent level) for the initial five (5) year term, as well as any extensions" also fails. (CSC's Mem. at 6.) As an initial matter, Mr. Mayer's report does not assume or suggest that the Exelon Contract would have been extended past the initial five-year term. At the hearing, Mr. Mayer testified that he is not offering an opinion as to whether CSC would have extended the subcontract. Rather, Mr. Mayer provides damages calculations based on the initial five-year term, and also provides damages calculations in the event the jury determines, based on the evidence presented at trial, that Exelon and CSC would have extended the contract for an additional one, two, or three years. The strength or weakness of the factual underpinnings of Mr. Mayer's testimony is "a matter not for exclusion," but "for `[v]igorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof ....'" LG Elecs., 2010 WL 3397358, at *6 (quoting Daubert, 509 U.S.
CSC's argument that Mr. Mayer's lost profits opinions are not based on a reasonable factual basis fares no better. When a party seeks damages in the form of lost profits under Illinois law, that party has "the burden of presenting to the jury sufficient evidence on which to determine the amount of its lost profits to a reasonable degree of certainty." Smart Mktg. Grp. v. Publ'ns, Int'l Ltd., 624 F.3d 824, 829 (7th Cir.2010) (citing Chicago's Pizza, Inc.. v. Chicago's Pizza Franchise Ltd. US.A, 384 Ill.App.3d 849, 323 Ill.Dec. 507, 893 N.E.2d 981, 994 (2008)). If it cannot do so, "only nominal damages are recoverable at the discretion of the trial judge." TAS Distrib. Co. v. Cummins Engine Co., Inc., 491 F.3d 625, 632 (7th Cir.2007). Damages for lost profits are "inherently uncertain and incapable of calculation with mathematical precision" due to their prospective nature, but a claimant must nevertheless present evidence that "affordfs] a reasonable basis for the computation of damages." Id. at 632-33; see also Tri-G, Inc. v. Burke, Bosselman & Weaver, 222 Ill.2d 218, 248, 305 Ill.Dec. 584, 856 N.E.2d 389 (2006) ("A recovery may be had for prospective profits when there are any criteria by which the probable profits can be estimated with reasonable certainty."). As the Illinois Supreme Court teaches,
Tri-G, 222 Ill.2d at 248, 305 Ill.Dec. 584, 856 N.E.2d 389 (citation omitted). Recovery of lost profits damages cannot, however, "be based on conjecture or sheer speculation." Id. (citation omitted); see also Smart. Mktg., 624 F.3d at 829 ("While courts do not ask for mathematical precision, they demand more than conjecture or speculation to support the jury's award.") (citing In re Estate of Tally, 376 Ill.App.3d 1082, 315 Ill.Dec. 866, 877 N.E.2d 1195, 1207 (Ill.App.Ct.2007)); F:A J Kikson v. Underwriters Labs., Inc., 492 F.3d 794, 802 (7th Cir.2007) ("lost profits cannot represent `hopes rather than the results of scientific analysis.'") (quoting Zenith, 395 F.3d at 420).
Mr. Mayer's lost profits opinions are based on reliable assumptions and are admissible under Rule 702. Specifically, Mr. Mayer bases his lost profits calculations on the volume and rate information provided in the subcontract agreement. As Mr. Mayer testified during the hearing, those figures reflect the parties'"best understanding" as to the volume of services SDI was to provide under the subcontract as well as the agreed-upon rates, assuming that a subcontract exists. CSC's many challenges to the veracity of those assumptions is a matter for "vigorous cross-examination, presentation of contrary evidence, and careful instruction on the burden of proof," not for exclusion. See Daubert, 509 U.S. at 596, 113 S.Ct. 2786; see also Lapsley, 689 F.3d at 805 ("A Daubert inquiry is not designed to have the district judge take the place of the jury to decide ultimate issues of credibility and accuracy.").
CSC argues that the Seventh Circuit and courts in this District have held that an expert's factual assumptions based on a
Likewise, Mr. Mayer's reliance on factual assumptions regarding SDI's expenses does not render his opinions inadmissible. Mr. Mayer testified credibly that he and his team derived these figures from conversations with SDI personnel, SDI's financial statements, and invoices. Notably, Mr. Mayer testified that the approach he used — called the "account analysis approach" — is a method that other professionals in his field use and rely on to analyze a company's incremental expenses associated with a contract. CSC did not challenge this testimony. Again, CSC is free to challenge these factual assumptions through cross-examination and the introduction of contrary evidence at trial.
Finally, Mr. Mayer also performed a "reasonableness test," wherein he compared SDI's operating profit margin in this case with SDI's operating profit margin in comparable past projects for different customers. Notably, SDI's operating profit margin under Mr. Mayer's damages opinion is near the lower range of SDI's operating profit margin for SDI's past projects.
"The general rule under Illinois law is that a new business has no right to recover lost profits" because such profits are "too uncertain, specific and remote to permit recovery." TAS Distrib., 491 F.3d at 633-34. The rule seeks "to limit the speculative element in estimating lost profits." BEM I, L.L.C. v. Anthropologic Inc., 301 F.3d 548, 555 (7th Cir.2002); see also Smart Mktg., 624 F.3d at 829.
CSC argues that the new business rule bars SDI from recovering lost profits in this case. The Court disagrees. SDI is a "previously established" business that has provided computer support services, such as the type involved in this case, repeatedly in the past. See Tri-G, 222 Ill.2d at 248, 305 Ill.Dec. 584, 856 N.E.2d 389 ("A plaintiff may satisfy the requirement of providing with a reasonable basis or with reasonable certainty damages for claimed lost profits through evidence of past profits in an established business.").
The purpose of a present value calculation is to, in Mr. Mayer's words, "bring a series of cash flows to a particular date to take into account the time value of money." In this case, Mr. Mayer determined present value as of the anticipated trial date at the time he issued his report, which was October 2010, and he applied a present value discount factor of 14.51%. CSC argues that Mr. Mayer has not provided a sufficient explanation of his present value analysis and that he should have used the date of breach (November 1, 2008),
To illustrate how Mr. Mayer's present value calculation affects his ultimate damages opinion, the Court reproduces a portion of Exhibit 5.0 to his report below:
Year 1 Year 2 Year 3 Year 4 Year 5
SDI Revenue $3,056,373 $2,878,532 $2,768,951 $2,654,150 $2,547,848
SDI $673,444 $731,721 $628,774 $572,913 $535,913
Subcontract
Profit
Present 1.2185 1.0641 0.9292 0.8106 0.7087
Value
Factor
Present $820,592 $778,624 $584,257 $464,403 $370,815
Value of SDI
Profit
As is apparent from Mr. Mayer's calculations, application of the present value factor analysis to the first two years results in a present value lost profits amount that is higher than the lost profits amount derived from Mr. Mayer's initial calculation of SDI's profit (i.e., "SDI Subcontract Profit"). On the other hand, the present value amounts for years three through five are lower than Mr. Mayer's initial calculation of SDI's lost profits.
Mr. Mayer testified during his hearing that he derived the 14.51% present discount factor from the 2009 Ibbotson Cost of Capital Yearbook ("Ibbotson"). He further stated that Ibbotson is a "standard reference" for analysts who provide valuation services. CSC did not challenge his testimony regarding Ibbotson. Based on this information, a reliable basis for Mr. Mayer's present value calculation exists.
Mr. Mayer, however, used the incorrect date from which to determine the present value of SDI's damages. Relying on In re Air Crash Disaster Near Chicago,
Allowing SDI to recover the present value of its damages as of the date of trial would run afoul of the well-established law in Illinois that in actions at law, "prejudgment interest is recoverable only where authorized by agreement of the parties or by statute." Kouzoukas v. Retirement Bd. of Policemen's Annuity & Benefit Fund of the City of Chi, 234 Ill.2d 446, 474, 334 Ill.Dec. 924, 917 N.E.2d 999 (2009) (citing Tri-G, 222 Ill.2d at 255, 257, 305 Ill.Dec. 584, 856 N.E.2d 389). SDI has not argued that any statute or agreement entitles it to prejudgment interest in this case.
As is apparent from reviewing Mr. Mayer's present value calculations as applied to SDI's lost profits in the table above, using the trial date to determine present value calculations results in SDI recovering more damages for the years that have passed between the date of the breach and the present than it could have recovered as of the date of the breach. Although labeled a "present value calculation," this is, in effect, merely a different way of accounting for prejudgment interest, which is not recoverable in this case.
Indeed, the Illinois Supreme Court has explained that, in an action at law, a plaintiff is not entitled to prejudgment interest, "notwithstanding that an injured party who is eventually compensated may suffer detriment from the inability to use the money from the date of loss to the date of compensation." Tri-G, 222 Ill.2d at 258, 305 Ill.Dec. 584, 856 N.E.2d 389 (citing Cont'l Casualty Co. v. Commonwealth Edison Co., 286 Ill.App.3d 572, 579, 221 Ill.Dec. 807, 676 N.E.2d 328 (Ill.App. Ct.1997)). It is therefore improper to use the trial date as the date for determining SDI's lost profits damages.
Both parties agree that the appropriate date for determining damages is an issue of law for the Court and not a fact issue for expert testimony. (R. 200, SDI's Brief Regarding Proper Date for Damages Calculations at 1, 5; R. 202, CSC's Brief in Support of Proper Date for Determining Damages at 4-5.) Indeed, Mr. Mayer testified during the hearing that he could "easily" recalculate SDI's lost profits damages based on a new date should the Court determine that the date he used is incorrect. As such, Mr. Mayer's use of the incorrect date does not require the Court to exclude his opinion, especially because Mr. Mayer has provided a reliable basis and methodology for his present value analysis. If SDI intends to offer Mr. Mayer's present value calculations at trial, Mr. Mayer must update his calculations in accordance with this Order. SDI must tender a copy of Mr. Mayer's revised calculations and damages figures to CSC no later than Monday, August 27, 2012.
Although CSC contends that Mr. Mayer's report is "replete with improper ultimate legal conclusions," CSC identifies only two examples: (1) Mr. Mayer's "use of the incorrect measure of damages under Illinois law with regard to measuring damages under quantum meruit" and (2) "the appropriateness of lost profit [sic] as an available measure of damages for breach of contract in this instance." (CSC's Mem. at 13.) CSC's first concern is moot given the Court's exclusion of Mr. Mayer's quantum meruit opinions, as explained above. With respect to CSC's second argument, Mr. Mayer will not be allowed at trial to opine on what he believes is the legal standard regarding the proper measure of recovery, or any other legal issue. Given Mr. Mayer's credible testimony during the hearing that he is not offering opinions regarding legal conclusions, however, the Court does not expect that CSC's concern will be an issue at trial. CSC, of course, is free to make appropriate objections to Mr. Mayer's testimony during the trial.
CSC's final argument for excluding Mr. Mayer's testimony is that its probative value is substantially outweighed by the danger of unfair prejudice and the risk of misleading the jury. (CSC's Mem. at 13.) Because CSC's entire argument in this regard consists of one conclusory sentence, it has waived this argument. See United States v. Collins, 604 F.3d 481, 487 n. 2 (7th Cir.2010) ("In passing, Collins' brief makes a perfunctory mention of the need for Rule 403 analysis of this evidence, but he did not develop that argument. As we have said numerous times, undeveloped arguments are deemed waived[.]"); Long v. Teachers' Retirement Sys. of Ill., 585 F.3d 344, 349 (7th Cir.2009) ('"[Unsupported and underdeveloped arguments are waived.'") (quoting United States v. Turcotte, 405 F.3d 515 (7th Cir.2005)).
For the reasons explained above, the Court grants in part and denies in part CSC's motion.
