Opinion ID: 164803
Heading Depth: 2
Heading Rank: 2

Heading: The Damages Issue

Text: 47 Having concluded that LifeWise did not fail to satisfy a condition precedent does not end our review. The question we now turn to is whether the district court erred in rejecting the fourth damages model proffered by LifeWise and in declining to consider what LifeWise refers to as reliance damages. We conclude that the court correctly ruled that the future lost profits evidence was speculative and thus properly excluded, and that the jury verdict in favor of ETRADE precludes reliance damages. 48 We review the district court's grant of summary judgment and its conclusions of law de novo, applying the same legal standard used by the district court under Rule 56. Essence, Inc. v. City of Federal Heights, 285 F.3d 1272, 1283 (10th Cir.2002). When applying this standard, we view the evidence and draw reasonable inferences therefrom in the light most favorable to the nonmoving party. N. Tex. Prod. Credit Ass'n v. McCurtain County Nat'l Bank, 222 F.3d 800, 806 (10th Cir.2000) (internal quotation marks and citations omitted). We review a district court's decisions excluding evidence at the summary judgment stage only for an abuse of discretion. Lantec, Inc. v. Novell, Inc., 306 F.3d 1003, 1016 (10th Cir.2002). Under this standard, we will not disturb the district court's decision unless we have a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances. Id. (internal quotation marks and alteration omitted).
49 LifeWise submitted a total of four damages models to the district court, all of which were excluded. LifeWise appeals only the district court's decision to exclude its fourth and final model. 10 In short, the first three damages models were excluded because they were found to be deficient under Rules 403 and 702, Daubert/Kumho, and New York's requirement that alleged losses be capable of being proved with reasonable certainty, see Schonfeld v. Hilliard, 62 F.Supp.2d 1062, 1071-72 (S.D.N.Y.1999). 50 LifeWise's fourth damages model based a damages amount on an estimate of $167 million in projected loans from April 2001 through the end of 2005. X Aplt.App. at 4502-03, 4510, 4514. In a nutshell, LifeWise predicted that based on the $167 million figure, gross revenue was about $44 million, and total costs about $30 million. Id. at 4502-03. When costs are subtracted from the gross revenue, the resulting lost profits equal $14 million (this figure increases to $19 million if a longer average loan life is used). Id. at 4503 & n. 6. Then, applying a discount rate of 13%, the resulting damages in present (April 1, 2001) dollars, depending on the average loan life and other variables, are from $6.7 million to $9.3 million. Id. at 4503-04. 51 The district court held that this fourth damages model (1) was unduly speculative because it was not sufficiently based on LifeWise's past, (2) failed to meet the requirements of Daubert and Rule 702 because Mr. Livingston was not qualified as an expert on the methodology employed in the statement, the methodology was not reliable, Livingston's testimony did not fit the case, and the statement was not helpful to a jury, and (3) was inadmissible under Rule 403 because any probative value was outweighed by the danger of being misleading and confusing to the jury and unnecessarily time-consuming. 52
53 LifeWise argues that the district court erred in failing to admit Mr. Livingston's damages testimony as an expert opinion under Rule 702, and as a lay witness opinion under Rule 701. 54
55 Rule 702 allows expert testimony only where the witness [is] qualified as an expert by knowledge, skill, experience, training, or education to offer such opinions. To qualify as an expert, Mr. Livingston was required to possess such skill, experience or knowledge in that particular field as to make it appear that his opinion would rest on substantial foundation and would tend to aid the trier of fact in his search for truth. Graham v. Wyeth Labs., 906 F.2d 1399, 1408 (10th Cir.1990) (quoting Bridger v. Union Ry. Co., 355 F.2d 382, 387 (6th Cir.1966)). The heart of expert testimony is the foundation. Whether a witness can parrot the results of a model does not mean that he is qualified to explain how the model works or to opine on the statistical validity or interpretation of the results. See Wilkins v. Univ. of Houston, 662 F.2d 1156, 1157 (5th Cir. Dec.1981) (Since multiple regression analysis is subject to misuse, courts cannot be expected to accept at face value conclusions derived from such a model absent expert testimony concerning the validity of the model itself. ) (emphasis added). 56 However, Mr. Livingston was not an expert in damages analysis or in any of the techniques used to create the September 13, 2002, damages model. He admitted that he had never used the methods used to create the September 13, 2002, damages model; he even confessed that I am not a [damages] modeler. IX Aplt.App. at 3994; see also XI Aplt.App. at 4850 (I'm not an accountant and I'm not an academic); id. at 4851 (I'm not an expert on regression analysis.); id. at 4852 (I am not a statistician and I'm not an expert about regression analysis.). Indeed, Mr. Livingston took a single undergraduate class in economics. But he took no accounting or finance courses, had no training in damage analysis, had never testified as a damages expert or prepared an expert damages report, had never taught a course or lectured on damages, and has never been published in the field. Id. at 4855-56. As the district court noted, Mr. Livingston is not a trained economist and cannot legitimately educate a jury on many of the complex economic aspects of [the damages model] such as `S-curves.' XIII Aplt.App. at 5634 n. 10; see also TK-7 Corp. v. Barbouti, 993 F.2d 722, 728 (10th Cir.1993) (affirming exclusion of witness who was not qualified as an expert); Broadcort Capital Corp. v. Summa Med. Corp., 972 F.2d 1183, 1195 (10th Cir.1992) (holding that witness with some general experience and education in the field lacked sufficient qualifications to qualify as expert in the area); Brown v. Am. Honda Motor Co., 939 F.2d 946, 952 (11th Cir.1991) (concluding that statistics, without an analytic foundation, are virtually meaningless.). Given Mr. Livingston's utter lack of any familiarity, knowledge, or experience with damages analysis, the district court did not abuse its discretion in ruling that he could not testify as an expert regarding such a complex subject matter as LifeWise's fourth damages model. 57 Moreover, the district court also held that LifeWise's fourth damages model failed to meet the standard set forth in Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), and Kumho Tire Co. v. Carmichael, 526 U.S. 137, 119 S.Ct. 1167, 143 L.Ed.2d 238 (1999), because (1) Mr. Livingston was not qualified as an expert in most of the methodology used in the statement, (2) the methodology is misleading, not reliable, and unsupported by use in any other comparable setting, (3) the methodology does not fit the present case because three month rolling averages are not appropriate for making profit predictions beyond one period, and S-curves are not appropriate for a young company such as LifeWise that claims to have a vast untapped market in need of its unique loan product, and (4) the model was not helpful to a jury but would tend to confuse, mislead, and waste time. XIII Aplt.App. at 5634-35. 58 Lifewise does not challenge any of the district court's bases for excluding the damages model itself under Daubert and Kumho Tire except by arguing that the district court improperly weighed evidence. Aplt. Br. at 55-56. However, the court found that LifeWise's use of three-month rolling averages, step-down methodologies, compounded monthly growth rates, S-Curves, and a 13% discount rate was unique to this case and not based on any recognized standard. XIII Aplt.App. at 5630. Moreover, the methodology was not in regular usage for predicting future profits, was not peer reviewed, has no uniform usage in any known industry, and is capable of manipulation to achieve virtually any desired result. Id. LifeWise does not challenge any of these points. The district court did not abuse its discretion. 59
60 The district court did not analyze Mr. Livingston's testimony as lay opinion testimony under Rule 701. LifeWise, however, argues that Mr. Livingston's position as CEO of LifeWise gives him personal knowledge to testify as to its lost profits. 61 When the subject matter of proffered testimony constitutes scientific, technical, or other specialized knowledge, the witness must be qualified as an expert under Rule 702. Rule 701 applies only [i]f the witness is not testifying as an expert. Fed.R.Evid. 701. Indeed, the rule expressly prohibits the admission of testimony as lay witness opinion if it is based on specialized knowledge. Id. In other words, a person may testify as a lay witness only if his opinions or inferences do not require any specialized knowledge and could be reached by any ordinary person. Doddy v. Oxy USA, Inc., 101 F.3d 448, 460 (5th Cir.1996). 62 In this case, Mr. Livingston testified only regarding LifeWise's fourth damages model. The model concerned moving averages, compounded growth rates, and S-curves. Mr. Livingston could not testify about these technical, specialized subjects under Rule 701. 63 The cases string-cited by LifeWise allowing a business owner to opine as to value do not support its position. In one group of cases, the courts found business owners' testimony admissible under Rule 701 because the owners had sufficient personal knowledge of their respective businesses and of the factors on which they relied to estimate lost profits. See Malloy v. Monahan, 73 F.3d 1012, 1015-16 (10th Cir.1996); Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153, 1174-75 (3d Cir.1993); In re Merritt Logan, Inc., 901 F.2d 349, 360 (3d Cir.1990); MCI Telecomms. Corp. v. Wanzer, 897 F.2d 703, 706 (4th Cir.1990). In other cases, the owners offered valuations based on straightforward, common sense calculations. See Securitron Magnalock Corp. v. Schnabolk, 65 F.3d 256, 265 (2d Cir.1995) (business owner calculated past lost profit damages for defamation based on actual decrease in sales); State Office Sys., Inc. v. Olivetti Corp. of Am., 762 F.2d 843, 847 (10th Cir.1985) (business owner calculated that its lost profits equaled its lost profit per computer times 29 lost sales); Teen-Ed, Inc. v. Kimball Int'l, Inc., 620 F.2d 399, 402-03 (3d Cir.1980) (plaintiff, an authorized dealer of defendant's product for five years, used historical gross profit margin and historical gross sales to determine lost profits). Mr. Livingston's proposed expert testimony does not fit either circumstance. 64 In the present case, although Mr. Livingston was the president of the company, he does not have personal knowledge of the factors used by LifeWise's fourth damages model to estimate its lost profits. On the other hand, the district court acknowledged that Mr. Livingston could have testified solely as a businessperson based on his personal knowledge and his experience as president of the company. He could have given a straightforward opinion as to lost profits using conventional methods based on LifeWise's actual operating history. Indeed, the court essentially invited LifeWise to have him so testify. See XIII Aplt.App. at 5639. 65 Instead of limiting Mr. Livingston's testimony to his experience as a businessperson and president of the company, however, LifeWise had him enter [ ] into the realm of rolling averages, S-curves, and compound growth rates that appear to be an amalgam of logic, hope, and economic jargon. Id. at 5636-37. But Mr. Livingston himself admitted that he can't recall any prior instances where he used such methods at LifeWise. XI Aplt.App. at 4961. Such subject matters fail to be rationally based on Mr. Livingston's perception, and therefore cannot be admissible as lay opinion testimony. 66
67 Even were we to find that Mr. Livingston was qualified to testify about the intricacies of LifeWise's September 13 damages model, we nevertheless agree with the district court that the model itself fails to satisfy New York's prohibition of speculative damages. Loss of future profits as damages for breach of contract are allowed under New York law only if (1) it is demonstrated with certainty that such damages have been caused by the breach, (2) the alleged loss is capable of proof with reasonable certainty, and (3) the particular damages were fairly within the contemplation of the parties to the contract at the time it was made. Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 493 N.E.2d 234, 235 (1986). Under the second prong, damages may not be merely speculative, possible or imaginary. Id. 68 The district court found that LifeWise's damages model was too speculative. LifeWise claims that its damages were reasonably certain and not speculative because (1) it had an established business, (2) it was profitable, (3) its damages statements were based on an analysis of historical operations, (4) it was not based on a deficient scientific formula, and (5) determination of the appropriate discount rate is for the jury. 69 Under New York law, evidence of lost profits by new businesses must be received with greater scrutiny. Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir.2000); see also Trademark Research Corp. v. Maxwell Online, Inc., 995 F.2d 326, 332 (2d Cir.1993); Kenford, 502 N.Y.S.2d 131, 493 N.E.2d at 234-35. This is because they do not have a reasonable basis of experience — i.e. historic profits-upon which to estimate lost profits with the requisite degree of reasonable certainty. Schonfeld v. Hilliard, 62 F.Supp.2d 1062, 1071-72 (S.D.N.Y.1999). 70 LifeWise argues it was not a new business because the concept was devised, assets were acquired, and loans were being issued three years before the Facility was signed. Aplt. Br. at 61. In addition, since the inception of its loan program, LifeWise made credit available to borrowers totaling more than $33 million. IV Aplt.App. at 1698. Finally, the Facility was in effect for well over a year before ETRADE first denied funding in April 2000. XV Aplt.App. at 6667-68. 71 While its history of operations clearly does not make LifeWise as firmly established as some other businesses, we think it probably places LifeWise outside of the scope of new businesses contemplated by Schonfeld and Kenford. Generally, cases applying a higher evidentiary standard for new businesses involve businesses that had not yet begun to operate, or have been running for just a few months. See, e.g., Lovely Peoples Fashion, Inc. v. Magna Fabrics, Inc., No. 95 Civ. 8450, 1998 WL 422482, at -2 (S.D.N.Y. July 22, 1998) (plaintiff dressmaker had only completed one single order for dresses); Kenford, 502 N.Y.S.2d 131, 493 N.E.2d at 235 (stadium, which would provide revenue, was never constructed); Zink v. Mark Goodson Prods., Inc., 261 A.D.2d 105, 689 N.Y.S.2d 87, 88 (App.Div.1999) (proposed television game show was to feature a host not well known to American audiences who had never previously hosted a game show); Lee Kin Chiu v. City of N.Y., 174 Misc.2d 422, 666 N.Y.S.2d 872, 874 (App.Div.1997) (plaintiffs were involved in new business for less than two months). 72 However, although the evidentiary standard may be heightened for new businesses, [w]hether the claim involves an established business or a new business, ... the test remains the same, i.e., whether future profits can be calculated with reasonable certainty. Ashland Mgmt. Inc. v. Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912, 916, 624 N.E.2d 1007 (1993); see also Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F.Supp. 1051, 1066 (S.D.N.Y.1996) (The New York Court of Appeals has instructed that the key issue is whether damages can be proven to `reasonable certainty.') (quoting Kenford, 502 N.Y.S.2d 131, 493 N.E.2d at 235). Thus, rather than focus on whether LifeWise should be labeled a new business or an established one, we address the issue of whether LifeWise can establish lost future profits with reasonable certainty. 73 LifeWise argues that despite the district court's findings, its business was profitable. Specifically, LifeWise claims that the second half of 2001 would have been a profitable period if its litigation expenses against ETRADE were excluded. Aplt. Br. at 62. However, LifeWise shut down its operations in April 2001 and thus severely cut its advertising, payroll, and other costs, yet continued to generate revenue as borrowers died. X Aplt.App. at 4511, 4522. Other than the second half of 2001, LifeWise concedes that it incurred five years of straight losses. Aplt. Br. at 62. 74 LifeWise argues, however, that a history of losses does not necessarily preclude an award of future profits. In support of this argument, LifeWise cites two cases, Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys R Us, Inc., 126 F.3d 15, 23-24 (2d Cir.1997), and Lamborn v. Dittmer, 873 F.2d 522, 533 (2d Cir.1989). Contrary to LifeWise's assertion, Yusuf Ahmed did not apply [ ] New York Law to uphold lost profits of $46 million even though plaintiff had substantial losses. Aplt. Br. at 62. Instead, the court held that an arbitrator's decision to award that amount did not meet the high standard for overruling a decision under the Federal Arbitration Act — manifest disregard of the law. 126 F.3d at 23-24. That case is therefore not applicable. Similarly, Lamborn did not involve lost profits damages, but rather concerned the proper methodology in estimating the value of an entire business. 873 F.2d at 533-34. It is thus distinguishable from the present case. 75 Even assuming that LifeWise could show lost profits damages despite never having been profitable, it has not done so here in a manner that satisfies New York's prohibition of speculative damages. In its damages report, LifeWise has failed to connect its past losses with its proposed future earnings. It remains a fact that LifeWise sustained losses in every year of its over five years of existence, and frequently experienced capitalization problems, yet the damages model predicted only uninterrupted future growth. 76 For instance, according to its audited financial statements, LifeWise lost at least $12 million from February 1996 to April 2001, for an average yearly loss of over $2.2 million. XI Aplt.App. at 4934. However, the damages model turns LifeWise into a successful company with over $14 million in net profits from April 2001 to December 2005, for an average yearly net profit of approximately $3 million. Similarly, during LifeWise's history, the number of loan originations fluctuated each month: 28 months show a decline in originations while 33 months show an increase. X Aplt.App. at 4647, XII Aplt.App. at 5244. However, under the LifeWise's damages model, Mr. Livingston anticipated not a single future setback. In LifeWise's actual history, its average monthly change in loan originations was an increase of $18,288. XI Aplt.App. at 4906-07, 4945. However, under its fourth damages model, LifeWise's average monthly increase is $44,992-nearly two and a half times more. Id. at 4922. Finally, over its five-year history, LifeWise originated approximately $24 million in loans. X Aplt.App. at 4647. Now, it claims that in a shorter period, it will originate over $167 million — over seven times more. LifeWise has simply failed to show any sort of link between its past history and its future predictions. 77 The two cases LifeWise cites in support of its position are distinguishable. In Merlite Industries, Inc. v. Valassis Inserts, Inc., 12 F.3d 373, 374 (2d Cir.1993), the plaintiff had been operating for over forty years, and was an established, profitable company. LifeWise, on the other hand, has never been profitable, and its attempt to use a small slice of its short operating history to show that enormous profits were expected from an unsubstantiated turnaround in business is unacceptable. Similarly, in Travellers International, A.G. v. Trans World Airlines, Inc., 41 F.3d 1570, 1579 (2d Cir.1994), the parties had a 20-year joint venture agreement. The court found that the long-term course of dealings between the parties, coupled with demonstrable profit margins and a verifiable pricing structure permitted lost profits to be calculated with reasonable certainty. This is a far cry from LifeWise's comparatively disappointing history of operations. The district court properly excluded LifeWise's fourth damages model as overly speculative under New York law. 11
78 In light of its disposition of the case on the liens issue and lost profits damages, the district court did not reach LifeWise's claim for reliance damages. XIII Aplt.App. at 5666. LifeWise now argues that even if this court affirms the district court on the issue of lost profit damages, we should still remand the case to the district court to determine what, if any, reliance damages it may recover. Based on the jury's finding that ETRADE's discontinuation of funding was not in breach of the Funding Agreement, see id. at 5593, we disagree. 79 In order to recover reliance damages for breach of contract, the plaintiff must demonstrate with certainty that there was a breach and that such damages have been caused by the breach. See Kenford Co. v. County of Erie, 67 N.Y.2d 257, 502 N.Y.S.2d 131, 493 N.E.2d 234, 235 (1986). In other words, there must be a definite and logical connection between what is proved and the damages a jury is asked to find. Berley Indus., Inc. v. City of New York, 45 N.Y.2d 683, 412 N.Y.S.2d 589, 385 N.E.2d 281, 283 (1978). 80 As noted above, the jury found that (1) ETRADE had a good faith basis for denying funding because it was not satisfied with the general business operations of LifeWise, but (2) ETRADE did not adequately disclose in writing the reasons for its dissatisfaction with LifeWise's business operations. XIII Aplt.App. at 5592-93. However, upon the district court's issuance of its Memorandum Opinion and Order granting ETRADE's Motion for Summary Judgment Regarding Lost Profits Damages and ETRADE's Motion for Judgment as a Matter of Law on the Basis of LifeWise's Failure to Satisfy Conditions Precedent Relating to Liens, the district court entered judgment in favor of ETRADE and vacated the jury verdict. Id. at 5667. 81 LifeWise argues that because the jury's verdict was vacated, its finding that ETRADE did not deny the funding in bad faith cannot be used to argue that no causal link connects ETRADE to LifeWise's damages. We disagree. A judge continue[s] to be bound by a jury's findings even if its verdict is vacated, so long as the underlying factfinding is not impugned. Artis v. Hitachi Zosen Clearing, Inc., 967 F.2d 1132, 1138 (7th Cir.1992); cf. Lytle v. Household Mfg., Inc., 494 U.S. 545, 550, 110 S.Ct. 1331, 108 L.Ed.2d 504 (1990). Here, the jury verdict was vacated not because it was thought to be unreliable, but rather because the district court's decision as to a matter of law made the verdict moot. Compare Dranchak v. Akzo Nobel, Inc., 88 F.3d 457, 459 (7th Cir.1996) (when events during trial and improper omission from jury instructions contributed to reasons for setting aside verdict, the verdict's factual accuracy is impugned, and verdict has no implications in court's analysis of non-jury issues). Thus, as the jury's finding that ETRADE denied funding in good faith was not appealed, it must stand. Such a finding removed any causal connection between ETRADE's denial of funding and LifeWise's reliance damages. 82 Alternatively, LifeWise argues that ETRADE, by refusing to provide adequate grounds for its dissatisfaction, deprived LifeWise of the ability to cure and resulted in the loss of the Facility and destruction of LifeWise's business. Aplt. Reply Br. at 26. This argument presupposes a right to cure, a right that we do not see in the agreement documents, and which was not pinpointed in LifeWise's briefs. When pressed in oral argument about where such a right originated, counsel for LifeWise first pointed to § 4.10 of the Funding Agreement, I Aplt.App. at 259. In his rebuttal argument, counsel corrected himself, stating that the right to cure was not in the Funding Agreement, but in sections 6.1(c) and 11.3 of the Trust Indenture. XV Aplt.App. at 6583, 6609. Finally, in a letter to the court after oral argument, counsel stated that he misread the proper references. According to counsel, (1) § 11.1 of the Funding Agreement, I Aplt.App. at 270, refers to the Trust Indenture for events of default; (2) § 6.1(c) and (d) of the Trust Indenture, XV Aplt.App. at 6583, defines Events of Default for breach of covenant and breach of warranty; and (3) § 11.3 of the Trust Indenture, XV Aplt.App. at 6609, further refers to breaches of warranty. 83 We do not read either the Funding Agreement or the Trust Indenture to provide an opportunity for LifeWise to cure its breach of § 4.10 of the Funding Agreement. Sections 6.1(c)-(d) and 11.3 allow 30 days to cure a breach of certain representations or warranties. XV Aplt.App. at 6583, 6609. Section 4.10 is a condition precedent to each funding, not a representation or warranty. I Aplt.App. at 257-59. Accordingly, the provisions in the Trust Indenture cited by LifeWise do not give a contractual right to cure a breach of section 4.10. 84 As a last resort, LifeWise essentially claims that a cure provision is implied in § 4.10 because (1) such notice would be useful only if LifeWise can address the alleged concerns, and (2) ETRADE in fact requested LifeWise to cure its dissatisfaction before it declined to fund. We disagree. 85 First, LifeWise does not oppose the district court's statement of undisputed facts, which indicates that the notice provision grew out of ETRADE's desire to have the ability to be released from the contract in its sole discretion. See XIII Aplt.App. at 5598. The provision ensures that a decision by ETRADE to terminate funding is objectively reasonable and in good faith. It does not, explicitly or implicitly, confer any right whatsoever to LifeWise to cure any defect identified by ETRADE. Second, the fact that ETRADE requested that LifeWise address ETRADE's dissatisfaction before ETRADE declined to fund does not create a contractual right to cure after ETRADE declined to fund. Finally, even if a cure provision existed, it could not be a basis for causation. LifeWise has offered no evidence that within 30 days, it could have improved its business operations to meet ETRADE's good faith satisfaction. 86 LifeWise therefore cannot claim reliance damages resulting from ETRADE's failure to fund or failure to provide adequate reasons for its refusal to fund. 87 AFFIRMED.