Opinion
Civil File No. 04-2936 (MJD/SRN).
January 3, 2007
Colin Wicker, Craig D. Diviney, Emily L. Fitzgerald, Thomas W. Tinkham, and Todd R. Trumpold, Dorsey Whitney, LLP, Counsel for Plaintiff.
Brian D. Buckley and Stellman Keehnel, DLA Piper, and Brian B. O'Neill, Craig S. Coleman, Jonathan W. Dettmann, Richard A. Duncan, and Peter C. Hennigan, Faegre Benson, Counsel for Defendant.
MEMORANDUM OF LAW ORDER
I. INTRODUCTION
This matter is before the Court on Defendant Associated Grocers, Inc.'s Motion to Exclude the Trial Testimony of SuperValu's Damages Expert [Docket No. 129]. The Court heard oral argument on December 7, 2006.
II. BACKGROUND
A. Factual Background
Plaintiff SuperValu Inc. is a Delaware corporation based in Eden Prairie, Minnesota. Defendant Associated Grocers, Inc. ("AG"), is a Washington corporation based in Seattle, Washington. Both are large wholesale grocers and competitors. This case relates to their competition for the business of a line of grocery stores owned by Haggen, Inc., in the Pacific Northwest. SuperValu alleges that AG used SuperValu's confidential information to successfully win Haggen's supply contract from SuperValu when it was up for renewal in 2004.
The factual background of this case is detailed in the Court's March 24, 2006 Summary Judgment Order. [Docket No. 125]
B. Procedural Background
SuperValu filed this lawsuit against AG on June 10, 2004. In SuperValu's First Amended Complaint, it asserted three claims against AG: Count I: Breach of Contract — Duty to Negotiate in Good Faith, Count II: Breach of Contract — Duty of Confidentiality Nonuse, and Count III: Misrepresentation. On March 24, 2006, this Court granted AG's Motion for Summary Judgment as to Count I: Breach of Contract — Duty to Negotiate in Good Faith, and Count III: Misrepresentation. [Docket No. 125] The Court denied SuperValu's Motion for Partial Summary Judgment. The only claim remaining before the Court is Count II: Breach of Contract — Duty of Confidentiality Nonuse.
AG now moves to preclude SuperValu's damages expert, Donald M. Nicholson, from testifying at trial and to preclude SuperValu from offering testimony at trial regarding any claim for lost profits damages.
C. Summary of Nicholson's Preliminary Expert Report
Nicholson's Preliminary Expert Report opines that SuperValu's total damages are between $26.6 million and $38.6 million. Nicholson attributes approximately $3.5 million dollars of this amount to business reduction costs at SuperValu's Tacoma operation, expenses SuperValu allegedly incurred in downsizing and reconfiguring its Tacoma warehouse following its loss of the Haggen account. Nicholson attributes between $23.1 million and $35.1 million of the damages total to SuperValu's lost profits, depending on whether the renewed contract would have continued for five, eight, or ten years.
In making his lost profits calculations, Nicholson assumes that, "but for AG's alleged wrongdoing, SuperValu would have continued to serve Haggen on the terms and conditions SuperValu proposed to Haggen in the Spring of 2004 for a renewal and extension of the Supply Agreement . . . for periods of 5, 8, and 10 years beyond the December 16, 2004 expiration of the Supply Agreement." (Nicholson Rep. at 3 (footnote omitted).)
III. DISCUSSION
A. Standard
1. Admissibility of Expert Testimony
The admissibility of expert testimony is governed by Federal Rule of Evidence 702. The proponent of the testimony has the burden to show by a preponderance of the evidence that the testimony is admissible under Rule 702. Lauzon v. Senco Prods., Inc., 270 F.3d 681, 686 (8th Cir. 2001). Under the Rule:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (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.
"Under the framework developed in Daubert, trial courts must serve as gatekeepers to insure that proffered expert testimony is both relevant and reliable. Trial courts are given broad discretion in fulfilling this gatekeeping role. . . ." Wagner v. Hesston Corp., 450 F.3d 756, 758 (8th Cir. 2006) (citations omitted). The proposed testimony must be useful to the factfinder; the expert witness must be qualified; and the proposed evidence must be reliable. Lauzon, 270 F.3d at 686.
As a general rule, the factual basis of an expert opinion goes to the credibility of the testimony, not the admissibility, and it is up to the opposing party to examine the factual basis for the opinion in cross-examination. Only if the expert's opinion is so fundamentally unsupported that it can offer no assistance to the jury must such testimony be excluded.Bonner v. ISP Techs., Inc., 259 F.3d 924, 929-30 (8th Cir. 2001) (citation omitted).
2. Washington Law on Damages
As the Court has previously determined, Washington state law applies to SuperValu's breach of contract claim. Under Washington law, damages for lost profits are recoverable if "(1) they are within the contemplation of the parties at the time the contract was entered, (2) they are the proximate result of defendant's breach, and (3) they are proven with reasonable certainty." Tiegs v. Watts, 954 P.2d 877, 886 (Wash. 1998) (footnote omitted). "The usual method for proving lost profits is to establish profit history." Id. (footnote omitted). "Although the third requirement is concerned with proof of the fact of damage rather than the amount, a claim for lost profits is properly denied when the alleged loss cannot be proved adequately and remains speculative." Golf Landscaping, Inc. v. Century Constr. Co., a Div. of Orvco, Inc., 696 P.2d 590, 594 (Wash.Ct.App. 1984) (citations omitted). SuperValu does not need to exactly calculate its loss; rather, the jury merely needs a reasonable basis to estimate lost profits. Pappas v. Zerwoodis, 153 P.2d 170, 175 (Wash. 1944).
B. Lost Profits Analysis: Assumption that Haggen Would Have Accepted April 20 Bid in 2004 and 2009
AG's first objection to Nicholson's analysis is that he assumes that SuperValu's contract with Haggen would have been renewed for periods of 5, 8, and 10 years beyond the expiration of the 1999 Supply Agreement. Nicholson explains that the time period that SuperValu could have reasonably expected to have continued to serve Haggen is an issue to be decided by the trier of fact.
AG argues that expert opinions regarding orders that a plaintiff could have filled had the defendant performed can be unduly speculative. It argues that Nicholson's lost profits calculations are not based on any evidence that the Court could find to establish a reasonable certainty of lost profits. Instead, he bases his calculations on an offer for a contract that was not binding on SuperValu because it was subject to internal review and was not accepted by Haggen. AG asserts that, in order to accept that Haggen would have accepted SuperValu's bid, despite facts such as Haggen's concerns about SuperValu's performance under the 1999 Supply Agreement, the existence of two other lower bids, the self-distribution option, and the possibility of lower pricing through negotiation.
AG correctly notes that Washington courts have held that unaccepted bids on new business may be too speculative to support a lost profits claim in a construction delay case. See, e.g.,Golf Landscaping, Inc. v. Century Constr. Co., a Div. of Orvco, Inc., 696 P.2d 590, 594 (Wash.Ct.App. 1984). However, in this non-construction delay case, SuperValu sought to renew an existing contract with an existing client and can provide a history of profits with that client. This is not the type of case that Washington courts would find too speculative to proceed before a jury.
This Court has already decided that there is sufficient evidence for a "jury to decide whether AG would have made the successful bid in the first place without the use of SuperValu's confidential information." (Mar. 24, 2006 Order at 20.) SuperValu will present various evidence to support its claim that it would have obtained the Haggen contract renewal. Based on the Court's decision and SuperValu's evidence, Nicholson was permitted to assume that SuperValu would have retained Haggen's business. Also, Nicholson does not purport to offer an expert opinion on the length of time that SuperValu could have kept the Haggen contract. Rather, he provides his opinion as to what SuperValu's profits would have been if the contracts had lasted for the proposed term of five years, or even for additional time, leaving the determination of how long the relationship would have lasted to the jury. Attacks on the foundation of Nicholson's opinion go to the weight, not the admissibility, of his testimony. Sphere Drake Ins. PLC v. Trisko, 226 F.3d 951, 955 (8th Cir. 2000). The Court concludes that Nicholson's opinion is not unduly speculative.
C. Reliability of Nicholson's Calculations
The Court also rejects AG's general assertion that Nicholson's calculations regarding SuperValu's possible future profits are overall too speculative. Nicholson's opinion is based on SuperValu's profit history with Haggen, which is a strong predictor of its future earnings. See Tiegs, 954 P.2d at 886 ("The usual method for proving lost profits is to establish profit history.") (footnote omitted). His assumptions are plausibly based on the April 20 offer because the offer was virtually identical to the terms of SuperValu's then-existing agreement with Haggen. Any issues AG has with Nicholson's particular accounting method can be addressed through cross examination.
D. Other Witnesses' Lost Profits Testimony
Several current or former SuperValu employees may be called to testify regarding the factual basis for SuperValu's lost profits claim. AG claims that these witnesses have no foundation to testify as to whether Haggen would have accepted the April 20 Bid, whether any deal would have been reached, or what the terms of any such deal would have been. It claims that their testimony would be speculative.
SuperValu offers its potential employee witnesses as lay witnesses, not expert witnesses. Under Federal Rule of Evidence 701, lay witness opinion testimony is admissible if it is "(a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness' testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702."
The offered employees have long histories with Haggen and are familiar with it, having been personally involved in the Haggen negotiations. They have relevant, first-hand knowledge of facts pertaining directly to the issue of whether Haggen would have accepted SuperValu's April 20 offer. They are qualified to testify as lay witnesses regarding the factual basis of SuperValu's lost profits claim.
E. Lost Profits Analysis: Reduction of Future Overhead Expenses
A portion of SuperValu's claim for lost profits consists of alleged future regional and home office overhead expenses at SuperValu's regional and national headquarters not specifically tied to the Haggen account. Most of these overhead expenses would be generated at SuperValu's regional headquarters for its northern region, in Minnesota, and corporate headquarters in SuperValu's home office, also in Minnesota. There are no specific goods or services associated with home office overhead allocations; instead the costs are allocated based on sales.
Nicholson estimates that, in the short-term, 100% of home office costs could not be avoided and 40% of regional level costs could not be avoided. He also estimates that some warehouse expenses could not be reduced in the short term. He concludes that 10% of unavoidable warehouse and regional costs and 5% of home office costs per year will become avoidable in 2008.
AG claims that in order to recover fixed overhead as an element of damages, SuperValu must show that the overhead was, in fact, fixed and could not be absorbed by serving other customers. However the cases on which AG relies are inapposite. Some of those cases address law from jurisdictions other than Washington regarding non-contract cases. See, e.g., Autotrol Corp. v. Continental Water Systems Corp., 918 F.2d 689, 694 (7th Cir. 1990) (applying Texas law on reliance damages). Other cases address claims for unabsorbed overhead in construction delay cases. See, e.g., Golf Landscaping, Inc. v. Century Constr. Co., a Div. of Orvco, Inc., 696 P.2d 590, 593 (Wash.Ct.App. 1984). Construction delay cases are inapplicable because they deal with the "special problems" in construction delay cases, which "have led to the creation of special rules for measuring damages in such cases." Lincor Contractors, Ltd. v. Hyskell, 692 P.2d 903, 907 (Wash.Ct.App. 1984) (citation omitted). Finally, AG takes issue with SuperValu's method of allocating overhead expenses among customers, but it does not allege double billing of the same overhead costs in multiple bills. Cf. Wright Schuchart, Inc. v. Seattle Sch. Dist. No. 1, No. 32732-1-I, 1996 WL 180628, at *18 (Wash.Ct.App. Apr. 15, 1996) (unpublished) (affirming dismissal of claim for overhead when the plaintiff "failed to segregate overhead costs that had already been included in other bills").
The Court concludes that under Washington law, Nicholson's opinions regarding recoverable overhead expenses are sufficient to permit a jury to reasonably estimate SuperValu's damages. In Williams v. Fixdahl, 491 P.2d 1309, 1311-12 (Wash.Ct.App. 1971), a breach of contract case, the court held that it was not error for the trial court to fail to require evidence regarding whether "certain fixed overhead items were reduced because of the failure of [the plaintiff] to perform the contract," because the "requirement is that damages be shown with reasonable certainty and a reasonable degree of accuracy." The appellate court did not reach the question of whether evidence that fixed overhead expenses were reduced due to the breach of contract could be considered, only that such evidence was not required. Id. See also Coast Trading Co., Inc. v. Parmac, Inc., 587 P.2d 1071, 1079-80 (Wash.Ct.App. 1978) (holding that "overhead expenses or plant `burden' should not have been deducted in computing . . . lost profit" and noting "[e]ven a business which has suffered a net loss before the breach is entitled to damages if the breach deprives it of additional revenue which it could have used to help defray its overhead expenses") (citation omitted).
In this case, the parties will present conflicting evidence to the jury regarding whether certain overhead expenses can be allocated to Haggen and how much overhead could be avoided. The Court notes that Nicholson did estimate that a certain percentage of overhead expenses could be avoided in the short term, and that even more overhead expenses could be avoided in the long term. AG's specific quarrels with Nicholson's calculations, such as his failure to allocate home office and regional expenses to a customer that leaves SuperValu, his failure to include any estimates of new business that SuperValu's Tacoma facility could reasonably be expected to acquire, and his decision to allocate home office expenses based on sales, are the types of issues that should be addressed on cross examination.
The Court concludes that under Washington case law, Nicholson's allocation of overhead expenses is not unduly speculative. Whether overhead costs should be allocated in some other way, avoided, or absorbed will be appropriately addressed during cross examination of Nicholson or through the testimony of another expert.
F. Tacoma Business Reduction Costs
SuperValu claims approximately $3.5 million in damages for Tacoma business reduction costs, due to downsizing and reconfiguration costs in response to SuperValu's loss of the Haggen business. AG admits that Nicholson's testimony regarding Tacoma business reduction costs is not speculative; however, it asserts that the testimony is still inadmissible because it provides no assistance to the jury.
When determining the admissibility of expert testimony, the Court "must ensure that the proposed expert testimony is relevant and will serve to aid the trier of fact. Expert testimony assists the trier of fact when it provides information beyond the common knowledge of the trier of fact." Kudabeck v. Kroger Co., 338 F.3d 856, 860 (8th Cir. 2003) (citations omitted).
AG notes that Nicholson's opinion on the Tacoma business reduction costs is entirely based on SuperValu employee witnesses for all facts, support, and explanations of these cost items. He is unfamiliar with the specifics of the costs or the process that was used to obtain those costs. AG concludes that Nicholson's testimony will not aid the jury in understanding the issues and evidence in this case. Additionally, it claims that there is no need for his testimony because SuperValu's employees, specifically its Rule 30(b)(6) designee, Ed Rawson, performed all of the analysis and can present the evidence to the jury if it is otherwise admissible. AG requests that the Court preclude Nicholson from testifying about the Tacoma business reduction costs.
Expert witnesses routinely rely on financial and accounting information provided by parties in support of their analysis.See, e.g., Forklifts of St. Louis, Inc. v. Komatsu Forklift, USA, Inc., 178 F.3d 1030, 1035 (8th Cir. 1999) (characterizing a damages expert's testimony as "routine" when the accountant "relied, surely to no one's surprise, on the books and records and financial information [the plaintiff] had provided").
Nicholson made the determination that the business reduction costs are appropriately included in damages calculations because they were incurred to achieve long-term savings which were credited to AG in the lost profits portion of the damages analysis. Although the amount of the costs was calculated by SuperValu employees, Nicholson decided that those costs were an appropriate element of SuperValu's overall damages and performed the analysis to ensure that lost profits and business reduction costs were not double counted.
Nicholson's testimony will be helpful because it will assist the jury in understanding how the Tacoma business reduction costs relate to SuperValu's overall damages. Nicholson will provide methodology and expertise to decide which items, including business reduction costs, should be included in the overall damages amount.
According, based upon the files, records, and proceedings herein, IT IS HEREBY ORDERED:
Defendant Associated Grocers, Inc.'s Motion to Exclude the Trial Testimony of SuperValu's Damages Expert [Docket No. 129] is DENIED.