Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-alsd-1_03-cv-00148/USCOURTS-alsd-1_03-cv-00148-5/pdf.json

Nature of Suit Code: 410
Nature of Suit: Antitrust
Cause of Action: 15:15 Antitrust Litigation

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IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ALABAMA

SOUTHERN DIVISION

NORRIS ARMSTRONG, et al., )

 )

Plaintiffs, )

 )

v. ) CIVIL ACTION 03-0148-WS-C

 )

HRB ROYALTY, INC., et al., )

 )

Defendants. )

_______________________________________)

 )

HRB ROYALTY, INC., et al., )

 )

Plaintiffs, )

 )

v. ) CIVIL ACTION 03-0635-WS-C

 )

NORRIS ARMSTRONG, et al., ) 

 )

Defendants. )

ORDER

This matter is before the Court on a motion in limine filed by the Block defendants (“Block”) to

exclude the testimony of plaintiffs’ expert witnesses Ernest H. Manuel, Jr. and Jeffrey R. Sport. (Doc.

194). The parties have filed briefs in support of their respective positions, (Docs. 195, 203, 204, 218,

240, 282), and the motion is ripe for resolution. After carefully considering the foregoing materials, the

Court concludes that the motion is due to be granted in part and denied in part.

BACKGROUND

In 1999, Block was engaged in litigation with a number of its major franchisees (“the Missouri

litigation”). Armstrong Business Services, Inc., (“ABS”), one of the plaintiffs herein, was a party to that

lawsuit. (Doc. 209 at 2). The parties engaged in settlement negotiations in October 1999 and, the

following month, a representative of the major franchisees sent Block a letter summarizing what he

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1Block describes the multiplier as part of “the settlement offer made by Block in 1999.” (Doc.

209 at 8; accord id. at 10).

2The “fair and equitable price” must be “no less than the total of” four items, including: (a) the

depreciated book value of the franchisee’s lien-free equipment; (b) the franchisee’s expended costs for

usable supplies on hand; (c) 80% of the franchisee’s total revenues for the 12-month period ending the

previous April 30; and (d) certain off-season expenses in excess of off-season revenue. (Id.). 

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believed to be the parties’ agreement for settlement of the Missouri litigation. (Id. at 2-3 & Exhibit 1). 

Under a paragraph entitled, “Term of Contract,” the letter contemplates amending each existing

franchise agreement to provide for a 60-year term with automatic 10-year renewal periods and to

provide Block, at the conclusion of each such interval, a purchase option “at a price equal to four times

gross revenues,” (“the multiplier”), subject to certain deductions. (Id.).1 No settlement along these

lines was finalized. (Id. at 9). 

The parties operated under franchise agreements providing that “[t]he term of this Agreement

shall run for a period of five years from the date hereof, with further provisions [sic] that it shall be

automatically renewed for successive periods of five years each, unless mutually terminated or

terminated pursuant to paragraph 12.” (Doc. 236, Exhibit 1 at 11, ¶ 18). Block filed a counterclaim in

the Missouri litigation, seeking in part a declaration that this language entitled Block to unilaterally

terminate the agreements at the end of any five-year term by declining to renew them. In 2002, the

Missouri Court of Appeals agreed with Block, ruling that this language did not create perpetual

contracts but contracts with fixed five-year terms renewable only upon the parties’ mutual consent,

failing which the agreements expire at the end of any given five-year term. Armstrong Business

Services, Inc. v. H&R Block, 96 S.W.3d 867 (Mo. App. 2002). Block thereafter gave the plaintiffs

notice that it would not renew the franchise agreements when their then-current five year terms expired

in 2003.

The franchise agreements also provide that, in the event of termination for any reason other than

sale to Block, “Block shall pay a fair and equitable price to Franchisee for Franchisee’s business

operated hereunder,” subject to certain minima. (Doc. 236, Exhibit 1 at 12-13, ¶ 24).2 In this lawsuit

the plaintiffs demand payment of a “fair and equitable price” pursuant to paragraph 24. The plaintiffs

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proffer Manuel and Sport as expert witnesses in connection with the calculation of a “fair and equitable

price.” Block argues that their testimony is inadmissible under Federal Rules of Evidence 401, 402,

403, 702 and 703 as interpreted by Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579

(1993), and like cases. 

EXPERT OPINIONS

Manuel is an economist, Sport a CPA. Neither has ever valued a business under the

nomenclature, “fair and equitable price.” Both conclude that the term means something different than

and, at least in this case, more than, “fair market value.” Sport provides two alternative calculations of

fair and equitable price; Manuel uses two similar formulae, plus a third not employed by Sport. Primary

elements of each calculation are some combination of: (a) future net profits to the plaintiffs had they

operated the franchises through 2009; and/or (b) a multiple of final year gross revenues. The first factor

is keyed to the plaintiffs’ asserted expectations as to how long they would hold the franchises, and the

second is keyed to Block’s 1999 settlement proposal in the Missouri litigation. All figures were

discounted to present value. The calculations of the plaintiffs’ experts are summarized below.

Manuel Sport

1. 2003 gross revenue x 4 $8,444,484 $8,534,610

 Sum of ¶ 24(a), (b), (d) 760,639 759,639

Total $9,205,123 $9,294,249

2. Net profit, 2004-2009 $3,006,047 $2,878,726

 2009 gross revenue x 2 5,116,069 5,448,198

Total $8,122,116 $8,326,924

3. Net profit, 2004-2009 $3,006,047

 2009 gross revenue x 4 10,232,139

Total $13,238,186

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3See Quiet Technology DC-8, Inc. v. Hurel-Dubois UK Ltd., 326 F.3d 1333, 1341 (11th

Cir. 2003)(although there is “some overlap” among these inquiries, they “are distinct concepts that

courts and litigants must take care not to conflate”).

4Expert testimony must also satisfy other applicable rules of evidence, including Rules 401, 402

and 403. Allison v. McGhan Medical Corp., 184 F.3d 1300, 1309 (11th Cir. 1999).

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(Doc. 195, Exhibit 5 at 60-62; id., Exhibit 7 at 85-87).

Block’s valuation expert, Charles M. Phillips, is also a CPA. Like the plaintiffs’ experts, he has

never valued a business under a “fair and equitable price” standard. Unlike them, however, he does not

consider the term to encompass a premium above fair market value. Using a discounted cash flow

(“DCF”) method and projected revenues and expenses of the franchises through 2009, Phillips

calculates “fair and equitable price” for the franchises as $1,759,096. This amount is less than the

$1,875,932 Phillips calculates as the minimum payment required by paragraph 24(a)-(d). (Doc. 254,

Exhibit 1 at 4, 22 & Exhibit B-2). 

DISCUSSION

The requirements for the admission of expert testimony in light of Daubert are well known and

need not be regurgitated at length herein. “Expert testimony may be admitted into evidence if: (1) the

expert is qualified to testify competently regarding the matters he intends to address; (2) the

methodology by which the expert reaches his conclusions is sufficiently reliable as determined by the

sort of inquiry mandated in Daubert; and (3) the testimony assists the trier of fact, through the

application of scientific, technical or specialized expertise, to understand the evidence or to determine a

fact in issue.” City of Tuscaloosa v. Harcros Chemicals, Inc., 158 F.3d 548, 562 (11th Cir.

1998)(footnote omitted). There are thus three discrete inquiries: qualifications, relevance, and

reliability.3 The burden of establishing these three requisites lies with the proponent. United States v.

Frazier, 387 F.3d 1244, 1260 (11th Cir. 2004)(en banc).4

An expert may be qualified “by knowledge, skill, experience, training, or education.” Fed. R.

Evid. 702. An expert is not necessarily unqualified simply because her experience does not precisely

match the matter at hand. See Maiz v. Virani, 253 F.3d 641, 665 (11th Cir. 2001)(an economic

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expert was qualified even though he “ha[d] no real estate development experience and thus no basis to

opine regarding how the pilfered funds would have been invested by the Plaintiffs”); id. at 669 (expert

knowledgeable concerning the practices of Mexican immigration authorities generally was qualified to

testify even though he had no experience with Monterey officials in particular).

To the requirement of Rule 401 that evidence possess a “tendency to make the existence of any

fact that is of consequence to the determination of the action more probable or less probable,” Rule

702 adds that expert evidence must “assist the trier of fact to understand the evidence or to determine a

fact in issue.” The evidence must “concern matters that are beyond the understanding of the average

lay person. ... Proffered expert testimony generally will not help the trier of fact when it offers nothing

more than what lawyers for the parties can argue in closing arguments.” United States v. Frazier, 387

F.3d at 1262-63. In addition, the expert evidence “must have a valid scientific connection to the

disputed facts in the case.” Allison v. McGhan Medical Corp., 184 F.3d 1300, 1312 (11th Cir.

1999). That is, there must be an adequate “fit” between the evidence and the case, which may be

lacking, for example, when the expert attempts to extrapolate animal studies into the human sphere. 

Rider v. Sandoz Pharmaceuticals Corp., 295 F.3d 1194, 1202 (11th Cir. 2002). 

The most heavily litigated component of the Daubert analysis is reliability. Expert testimony

“must be ‘scientific,’ meaning grounded in the methods and procedures of science, and must constitute

‘knowledge,’ meaning more than subjective belief or unsupported assumptions.” McDowell v. Brown,

392 F.3d 1283, 1298 (11th Cir. 2004). Rule 702 identifies three components of the reliability element:

“(1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable

principles and methods, and (3) the witness has applied the principles and methods reliably to the facts

of the case.” 

Daubert identifies several non-exclusive factors that a court may consider as appropriate in

gauging the reliability of the principles and methods utilized by the expert: (1) whether the methodology

has been, or is amenable to, testing; (2) whether it has been subjected to peer review and/or

publication; (3) the known and potential error rate of the methodology; and (4) whether it has been

generally accepted in the relevant scientific community. 509 U.S. at 593-94. “Notably, ... these

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factors do not exhaust the universe of considerations that may bear on the reliability of a given expert

opinion, and a federal court should consider any additional factors that may advance its Rule 702

analysis.” Quiet Technology DC-8, Inc. v. Hurel-Dubois UK Ltd., 326 F.3d 1333, 1341 (11th Cir.

2003). Among such factors, “[i]n evaluating the reliability of an expert’s method, ... a district court may

properly consider whether the expert’s methodology has been contrived to reach a particular result.” 

Rink v. Cheminova, Inc., 400 F.3d 1286, 1293 n.7 (11th Cir. 2005).

Whatever factors are considered, the Court’s focus should “be solely on principles and

methodology, not the conclusions they generate.” Allison v. McGhan Medical Corp., 184 F.3d at

1312 (internal quotes omitted). It is therefore error to conflate admissibility with credibility, as by

considering the relative weight of competing experts and their opinions. Quiet Technology v. HurelDubois, 326 F.3d at 1341. Thus, for example, “a district court may not exclude an expert because it

believes the expert lacks personal credibility because of prior bad acts or other prior instances of

untruthfulness.” Rink v. Cheminova, 400 F.3d at 1293 n.7. 

With respect to the third reliability criterion of Rule 702, errors in an expert’s application of a

reliable method generally implicate credibility rather than reliability. See Quiet Technology v. HurelDubois, 326 F.3d at 1345-46 (using incorrect numbers in a reliable formula is not grounds for

exclusion under Daubert).

Certain additional observations are worth making. “Presenting a summary of a proffered

expert’s testimony in the form of conclusory statements devoid of factual or analytical support is simply

not enough [to carry the proponent’s burden].” Cook ex rel. Estate of Tessier v. Sheriff of Monroe

County, 402 F.3d 1092, 1113 (11th Cir. 2005). Similarly, “nothing in either Daubert or the Federal

Rules of Evidence requires a district court to admit opinion evidence which is connected to existing data

only by the ipse dixit of the expert.” Id. at 1111 (internal quotes omitted). An expert’s unexplained

assurance that her opinions rest on accepted principles fares no better. McClain v. Metabolife

International, Inc., 401 F.3d 1233, 1222 (11th Cir. 2005). 

Moreover, “[t]he Daubert requirement that the expert testify to scientific knowledge —

conclusions supported by good grounds for every step in the analysis — means that any step that

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5Having set forth these governing principles, the Court will not repeat them each time one

becomes applicable to a particular expert or argument advanced by the parties.

6On the matter of contract interpretation by the jury, Block submitted the affidavit of William T.

Ross to establish that Block did not author the franchise agreements. (Doc. 218, Exhibit 10). The

plaintiffs have moved to exclude the affidavit. (Doc. 223). Because the Court need not consider the

affidavit in order to decide any pending motion, the motion to strike is denied as moot.

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renders the analysis unreliable under the Daubert factors renders the expert’s testimony inadmissible.” 

McClain v. Metabolife, 401 F.3d at 1245 (emphasis in original)(internal quotes omitted); accord

Hudgens v. Bell Helicopters/Textron, 328 F.3d 1329, 1344 (11th Cir. 2003) (“[A]n expert’s failure

to explain the basis for an important inference mandates exclusion of his or her opinion.”).5 

Neither side has requested a hearing. A trial court’s decision whether to hold such a hearing is

committed to its sound discretion, Cook v. Sheriff of Monroe County, 402 F.3d at 1113, and absent

a request the Court concludes that no hearing is required. Cf. id. at 1108, 1114 (no abuse of

discretion in failing to hold a hearing when not requested). Even when a hearing is requested, the court

has discretion to deny the request, especially when the case is not a complicated one involving multiple

expert witnesses. E.g., United States v. Hansen, 262 F.3d 1217, 1234 (11th Cir. 2001). Although

there are multiple expert witnesses in this case, their testimony is not — despite the best efforts of the

parties to suggest otherwise — particularly complicated, especially compared with those cases

involving dueling medical evidence as to which a hearing may be a fruitful exercise. See id. (trial court

should grant a motion for hearing when the opponent presents conflicting medical literature and expert

testimony). 

As discussed in the Court’s order denying Block’s motion in limine to exclude evidence

concerning plaintiff Armstrong’s expectations of the agreements’ duration, the phrase “fair and equitable

price” unambiguously excludes equitable considerations. However, the term is ambiguous as to the

time as of which the valuation is to be pegged and as to whether it approximates “fair market value” or

envisions different valuation criteria. Because the phrase is ambiguous, it will be for the jury to decide

its meaning and thus how valuation should proceed.6 The issue here is the extent, if any, to which

Manuel and/or Sport can testify as experts to aid the jury in making that determination. 

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A. Qualifications.

Block argues that, due to their admitted unfamiliarity with “fair and equitable price,” Manuel and

Sport are unqualified to render an expert opinion that it includes a premium over fair market value or

that the premium should be calculated using particular attributes such as future profits and/or a multiple

of present or future gross revenues. The Court agrees. The plaintiffs have cited, and the Court has

located, no support for the proposition that one professing ignorance of a term is thereby qualified to

render an expert opinion as to its meaning. Such a person by definition possesses no “knowledge, skill,

experience, training, or education” sufficient to testify as an expert. 

The plaintiffs cite Maiz v. Virani, 253 F.3d 641 (11th Cir. 2001), but that opinion is of no

assistance to them. In Maiz, the Court ruled that a forensic accounting expert was entitled, “to the

extent he spoke of the contracts” at issue, to “d[o] so in the context of setting forth or explaining

reasonable assumptions he was asked to make by counsel.” Id. at 667. The Court suggested that, to

the extent the witness purported to testify as an expert as to the meaning of disputed terms, there was

error but not reversible error. Id. at 666-67. Maiz may allow Manuel and Sport to testify concerning

the assumptions as to the franchise agreements’ meaning that they were asked to make by counsel in

creating their valuations, but it does not entitle them to testify as experts as to the meaning of the

agreements. 

Thus, Manuel and Sport cannot testify as experts concerning:

• the meaning of “fair and equitable price” or its relation to fair market value;

• the proper components of a fair and equitable price, including: lost future profits;

terminal price as a multiple of gross revenues; and/or the categories identified in

paragraph 24(a)-(b) and (d) as being in addition to a multiple of gross revenues;

• the meaning of paragraph 18 or 25 of the franchise agreements;

• the parties’ expectations as to the duration of the franchise agreements or the bases of

those expectations;

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7This ruling does not preclude Manuel and Sport from testifying (if they can do so consistent

with Rule 702, Daubert and other evidentiary rules) that, for example, their methodology or any

component of it is used by accounting and/or economic experts in other relevant valuation schemes. 

What they may not do is testify that their methodology or any portion of it represents an appropriate

measure of fair and equitable price. 

8Phillips was reduced to “seek[ing] guidance in a dictionary for the definitions of the words fair

and equitable used as adjectives.” (Doc. 220 at 116).

9Because Phillips calculated fair market value and did so using a recognized (DCF) method,

and because the plaintiffs have not challenged his qualifications to do so, Phillips may testify as an

expert as to the calculation of the business’ fair market value. What he may not do — without showing

expert qualifications to do so far beyond those identified in his report — is testify that fair market value

is an appropriate measure of fair and equitable price.

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• the meaning, correctness or fairness of any court order.7

A similar disability presumably extends to Block’s valuation expert, whose unfamiliarity with

“fair and equitable price” rivals that of Manuel and Sport.8 If so, the jury will hear no expert testimony

as to what “fair and equitable price” means or how it should be calculated. The calculations prepared

by the experts will simply be available for use by the jury should it determine from the evidence that

those of one or another reflect or best approximate its conclusion as to what “fair and equitable price”

means.9

B. Relevance and Reliability.

Block argues that Manuel and Sport cannot testify even as to the assumptions they were asked

to rely on by counsel, to the extent those assumptions included: (1) an actual or expected duration of

the agreements past 2003; or (2) a multiple of present or future gross revenues. Block argues that all

such evidence is factually and/or legally irrelevant, such that their utilization would yield unreliable

quantifications of fair and equitable price. 

The ruling of the Missouri Court of Appeals establishes conclusively the duration of the

franchise agreements, and any contrary assumption is thus necessarily unreliable. However, and as

discussed in the Court’s order granting in part Block’s motion in limine concerning Armstrong’s

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10Because the settlement proposal is not inadmissible under those rules, Block’s argument

under Rule 703, which rule assumes the inadmissibility of evidence relied on by an expert, need not be

considered. (Doc. 195 at 34-36). 

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expectations regarding the duration of the franchises, the agreements do not unambiguously preclude

evidence of such expectations, and it remains open to the plaintiffs to prove the parties intended that the

business be valued as of the expected date of termination (i.e., Armstrong’s retirement) rather than as

of the actual date of termination. Moreover, and as set forth in the same order and in the Court’s order

denying Block’s motion to clarify, the plaintiffs’ claim that Block is equitably estopped to deny that the

parties’ expectations as to duration are relevant to the determination of fair and equitable price is still a

part of this lawsuit. Given this situation, the opinions of Manuel and Sport cannot be excluded on the

grounds that the parties’ expectations as to the agreements’ duration are irrelevant or that consideration

of them consequently results in unreliable calculations of fair and equitable price.

The Court has already rejected Block’s motion in limine, based on Rules 402, 403 and 408, to

exclude evidence relating to settlement offers and discussions.10 Block’s insistence that a settlement

offer necessarily is an unreliable indicator of value simply repackages the argument made and rejected

in that motion. Thus, the opinions of Manuel and Sport cannot be excluded on the grounds that the

settlement proposal is irrelevant or that consideration of it consequently results in unreliable calculations

of fair and equitable price. 

C. Challenges to Calculations.

Block identifies three errors in the calculations of Manuel and Sport which, it says, renders their

mathematical conclusions unreliable: (1) in calculating net profit for the years 2004-2009, they relied on

the franchises’ historical performance from 1998-2002 but not 2003, a year in which revenues

declined; (2) in calculating future net profits, they assumed that the plaintiffs would develop ten new

offices over the next ten years; and (3) Sport used a lower discount rate than he would use for clients

not in litigation. (Doc. 195 at 25-30; Doc. 218 at 9-11). 

Block does not assert that a prior year’s results can never be ignored or discounted, but argues

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that the experts’ reasons for ignoring 2003 were makeweight. Assuming without deciding that Manuel

and Sport had no legitimate reason to ignore 2003 results, the cases cited by Block as supporting

exclusion involved egregious omissions not comparable with that at issue here. As the Eleventh Circuit

has stated, “[n]ormally, failure to include variables will affect the analysis’ probativeness, not its

admissibility.” Quiet Technology v. Hurel-Dubois, 326 F.3d at 1346 (internal quotes omitted). 

Likewise, plugging incorrect numbers into a reliable formula serves only to “impugn the accuracy of [the

expert’s] results.” Id. at 1345. 

Armstrong advised Manuel and Sport that he planned to open ten offices between 2003 and

2013, and the experts utilized that information in calculating future net profits. Block offers no evidence

that Armstrong did not harbor these plans or that they were ill-formed or unrealistic. Instead, Block

faults Manuel and Sport for failing to perform independent feasibility studies or to confirm the sequence,

timing and location of the new offices. Block relies on cases in which assumptions about future

economic activity were facially unreasonable, but it has done nothing to show such unreasonableness

here.

Sport testified that he used a conservative discount rate, the equivalent of a thirty-year treasury

rate, resulting in a relatively high present value. He testified that he did so because such conservatism

ensures that the client will in fact receive the stream of income payments indicated by his estimates of

future profits. He also testified that, if he were valuing ABS for a potential purchaser, he would use a

higher discount rate reflecting market risk and other factors that a potential purchaser should take into

consideration. (Sport Deposition at 30-31). Block describes Sport’s approach as litigation-driven, but

it is more accurate to say that it is client-driven. When representing a purchaser, Sport employs a

higher discount rate to prevent the client from paying too much but, when representing a seller, he

employs a lower discount rate to prevent the client from receiving too little. Sport’s testimony suggests

that this approach is in line with what reasonable CPAs do, and Block has not contradicted that

proposition. Nor has Block shown that this is anything more than a dispute over variables and thus an

inappropriate basis for exclusion.

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D. Rule 403.

Block’s argument focuses on the damage that would be done were Manuel and Sport allowed

to offer expert testimony that their calculations measure fair and equitable price. (Doc. 195 at 41-43). 

However, as discussed in Parts A and B, they will not be allowed to so testify but only to offer

calculations based on what are at this juncture supportable assumptions provided by counsel. The

alleged flaws in their computations of future net profit and present value are, as discussed in Part C,

readily amenable to effective challenge on cross-examination. As limited by this order, the probative

value of the testimony of Manuel and Sport is not “substantially outweighed” by the concerns Rule 403

addresses.

CONCLUSION

For the reasons set forth above, Block’s motion in limine to exclude the testimony of plaintiffs’

expert witnesses is granted to the extent that the plaintiffs are precluded from offering purportedly

expert testimony as to: the meaning of the term “fair and equitable price” or its relation to fair market

value; the proper components of a fair and equitable price; the meaning of paragraphs 18 or 25 of the

franchise agreements; the parties’ expectations as to the duration of the franchise agreements, or the

bases of those expectations; or the meaning, correctness or fairness of any court order. In all other

respects, Block’s motion is denied. 

DONE and ORDERED this 14th day of October, 2005.

s/ WILLIAM H. STEELE

UNITED STATES DISTRICT JUDGE

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