Friday, June 06, 2008

Challenges to Valuation and Damage Experts Increasing Dramatically

This posting was written by Bruce S. Schaeffer of Franchise Valuations, Ltd., co-author of CCH Franchise Regulation and Damages.

It is becoming clearer and clearer that the first thing litigants must do when retaining experts is to address their qualifications and ability to withstand “Daubert” challenges.

A recent study done by PriceWaterhouseCoopers on challenges to financial expert witnesses reported that 30% were completely excluded, 18% were partially excluded, and 49% were admitted. Although they represent only a minority of the experts used, financial expert witnesses have been subject to a dramatically increasing number of challenges in both federal and state courts.

The study found:

 Since Kumho Tire v. Carmichael, 526 U.S. 137 (1999), the number of challenges to all types of experts has been increasing.

 In each of the three years from 2003 to 2005, a higher percentage of financial expert witnesses were excluded than non-financial experts.

 During the same period, the success rate of challenges to defense experts was greater than challenges to plaintiff experts.

 Financial experts experienced the highest rates of exclusion in fraud, antitrust, employment discrimination, bankruptcy and intellectual property matters.

This trend is particularly pernicious because (1) proof of damages can not be dispensed with in making out a case and (2) "Daubert" motions to disqualify financial experts, when made just before trial, can leave a party completely without an expert or time to get another one if the period for discovery and designation of experts has passed.

For example, in the case In re Med Diversified, Inc. 346 B.R. 621 (Bankr. E.D. N.Y. Aug. 2, 2006), a U.S. Bankruptcy Court held that:

 An expert's benchmarking analysis was unreliable and tainted the expert's analyses under the discounted cash flow valuation method and the guideline company valuation method;

 The expert's discounted cash flow analysis was unreliable and thus inadmissible;

 The expert's methodology in generating enterprise valuation under the guideline company valuation method was unreliable;

 The expert's analysis under the direct market comparable transaction valuation method was flawed and thus unreliable;

 The expert's bias warranted disqualification of the expert and his report; and

 The expert’s patently unreliable report could not be redone to render it admissible.

Additional information on expert witness issues appears in CCH Franchise Regulation and Damages by Byron E. Fox and Bruce S. Schaeffer.

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