Why experts need to support their numbers

A financial expert’s testimony usually is based on assumptions. But the trouble with assumptions is that they’re not always supported by facts — and, to pass muster with a judge, they must be. Or, as the Ohio court in Wallace v. Kalniz Choksey Dental–Ralston recently put it, an expert’s calculations are “only as good as the assumptions on which they are based.”

Trial court excludes economist

In late 2007, Heath Wallace entered talks to explore the possibility of selling his dental practice near Bowling Green to a larger dental group. Negotiations continued throughout 2008, but the deal eventually fell apart and negotiations ceased in January 2009. The other dental group later opened a new office 10 miles from Wallace’s office.

Wallace sued those parties for breach of contract and several tort claims. The trial court granted the defendants’ motion to strike the report and affidavit of Wallace’s expert economist, reasoning that the expert wasn’t qualified to testify and the assumptions on which his loss calculations were based were speculative and unreliable.

Wallace appealed on several grounds. He challenged, among other things, the court’s disqualification of his expert’s testimony.

Appeals court disagrees

The expert who provided opinions on Wallace’s economic loss holds a Ph.D. in economics from the Massachusetts Institute of Technology and performs research on labor market issues, new hires and labor shortages. For this case, he prepared discount cash flow analyses using three time periods and three scenarios:

  1. Wallace continuing with his current practice,
  2. Wallace upgrading his office as originally planned, and
  3. Wallace upgrading and adding 10% additional collected income assumed to have been lost because of the new practice’s entry into the market.

The expert estimated Wallace’s economic loss at between $251,319 and about $2.7 million.

The trial court acknowledged that the expert is a highly qualified economics and econometrics expert. It nonetheless struck his report under Rule 702(B) because he wasn’t qualified to act as a business valuation expert. On the other hand, the court of appeals found that, while the expert performed calculations applying the formula used in the business valuation performed at the time Wallace originally bought his practice, he didn’t himself perform a business valuation.

Unsupported assumptions undermine

The trial court also excluded the expert’s testimony because, though the methods he used to calculate Wallace’s losses appeared accurate and appropriate, the assumptions on which those calculations were made were speculative and unreliable. The appellate court affirmed, finding that his deposition testimony revealed that he’d made purely speculative assumptions in arriving at his projections.www.warrenaverett.com

For example, he “did little more than to attribute his predicted flat growth [of Wallace’s practice] in 2009 and 2010 to the 2008 recession and to insist that his methodology should be accepted because he had been permitted to offer opinions in hundreds of other cases.” The expert also testified that employees losing their jobs would “maybe” postpone dental care because of lost insurance, but he admitted to doing no research and reviewed no peer-reviewed articles to support his theory.

He further projected that Wallace’s collections would have been 10% higher if the defendants hadn’t entered the Bowling Green market. But the expert again admitted that he’d done no research to verify the validity of his assumption that a new competitor would take some business from Wallace.

Opinions could be excluded

The appellate court held that the overall state of the economy and unsupported assumptions about consumers’ practices in seeking dental care in a depressed economy provided an inadequate foundation for the plaintiff’s expert’s projections. The assumptions that an expert bases his or her opinions on must be supported by evidence in the factual record — otherwise, those opinions could be excluded.

If you have questions about this, or any other matter, visit www.warrenaverett.com to learn more about our Business Valuation services, as well as Forensic, Valuation and Litigation Support Services.