Litigation & Disputes Bulletin: Q4 2021
In This Issue:
- Connecticut Supreme Court Clarifies Double-Counting Rule
- Patent Infringement Case Provides Judge With a Plethora of Daubert Challenges to Rule on
- Kentucky Appeals Court Explains State’s Goodwill Law
- In Buyout Dispute, ‘Downward Bias’ Sinks Expert’s Fair Value Determination
Oudheusden v. Oudheusden (II), 2021 Conn. LEXIS 111 (April 27, 2021)
In a recent decision, the Connecticut Supreme Court clarified this jurisdiction’s approach to double counting (or double dipping). The court acknowledged that it had never been asked to determine whether the rule against double counting applied where the case involved the distribution of the value of the owner’s business and the consideration of income from that business to determine alimony.
Value vs. ownership: The husband owned two closely held businesses that were the sole source of his gross annual income. The trial court credited the testimony of the wife’s valuation expert and found that the combined value of the two businesses was $904,000. Based on this finding, in turn, the court awarded the wife a permanent nonmodifiable alimony of $18,000 per month. Additionally, the trial court awarded the wife the sum of $452,000, representing her half of the value of the businesses.
The husband successfully appealed the ruling with the state appellate court, which found the trial court improperly double counted the husband’s income by permitting it to be considered for purposes of the division of property and then again for the determination of alimony.
In asking for review by the state Supreme Court, the wife argued that the appellate court had misapplied the double-counting test by treating the allocation of a portion of the business value to the wife as the equivalent of transferring an interest in the business. Here, the trial court awarded 100% of the ownership of the businesses to the husband, which meant he had an income stream from which to make the alimony payments that was separate from the lump-sum payment the plaintiff received as part of the property distribution.
The state Supreme Court agreed with the wife. The court explained that the issue of double counting has arisen in the context of pensions and retirement. The court noted that, while no case law says so specifically, the court itself has suggested it would be double counting if income from property that was awarded to the nonpaying spouse and, therefore, was no longer available to the paying spouse, would be awarded to the nonpaying spouse in the form of an alimony award.
But the high court had never “clearly extended our case law regarding double counting to the valuation of businesses.” The court said case law from other jurisdictions suggested “it is not double counting for a trial court to award a spouse a lump sum representing a portion of the value of a business and also awarding the spouse alimony that is based on the paying spouse’s actual income from that business.”
Here, the trial court did not improperly double count the value of the [husband’s] businesses “because any rule against double counting does not apply when the distributed asset is the value of a business and the alimony is based on income earned from that business.”
Shire ViroPharma Inc. v. CSL Behring LLC, 2021 U.S. Dist. LEXIS 61551 *; 2021 WL 1227097 (March 31, 2021)
Summary. In this patent infringement case, the court ruled on a plethora of Daubert/Rule 702 challenges to rule on. The opinion provides an exhaustive list of Daubert-related issues that the court rules on and provides a good tutorial on the real purposes of Daubert.
Case digest. This patent infringement case opinion deals with motions to exclude testimony of experts under Daubert/Rule 702. The underlying case deals with an alleged infringement of various patents that involve drugs used for the treatment and prevention of a condition known as hereditary angioedema. Much of the opinion is very technical and not necessarily helpful to the financial expert witness. As such, this digest will focus on the actual opinions of the court directly related to the Daubert/Rule 702 issues. If one is interested in the technical aspects of the case, that information can be accessed by reading the full opinion.
Hereditary angioedema. Hereditary angioedema (HAE) is a rare genetic disorder causing insufficient natural production of functional or adequate amounts of a protein called C1 esterase inhibitor (C1-INH). “HAE can be treated either acutely—meaning immediate treatment of an HAE attack in order to slow it down or stop it altogether—or prophylactically—meaning administration of a medication on a regular basis to prevent attacks.”
The infringement law suits. At issue in this case are patents owned by plaintiff (Shire ViroPharma Inc.) known as the patents-in-suit. Plaintiff alleged that defendants (CSL Behring LLC and CSL Behring GMBH) have infringed upon some of the patents used in treating HAE. “Defendants assert counterclaims for both invalidity and for a declaration of noninfringement.” At issue are competing motions to exclude, under Daubert, all or portions of opinions included in both parties’ expert reports. “Currently, there are only three patents at issue—the ‘111 patent, the ‘788 patent, and the ‘423 patent (collectively, the “patents-in-suit”), with ten asserted claims.”
Standard of review. Federal Rule of Evidence 702 places district courts in the role of gatekeeper. “[E]nsure that any and all [expert] testimony … is not only relevant, but reliable.” “The Daubert inquiry ‘embodies a trilogy of restrictions on expert testimony: qualification, reliability, and fit.’”
Qualifications. The focus is on whether the qualifications an expert have provide a foundation for the witness to testify meaningfully on a given matter.
Reliability. The testimony should be based on methodologies and procedures of science rather than subjective belief or speculation. The 3rd Circuit has outlined a nonexhaustive list of factors to be considered in determining the reliability of a particular method, as follows: “(1) whether a method consists of a testable hypothesis; (2) whether the method has been subject to peer review; (3) the known or potential rate of error; (4) the existence and maintenance of standards controlling the technique’s operation; (5) whether the method is generally accepted; (6) the relationship of the technique to methods which have been established to be reliable; (7) the qualifications of the expert witness testifying based on the methodology; and (8) the non judicial uses to which the method has been put.” Disputes as to accuracy or relevance go to the testimony’s weight but not its admissibility.
Fit. The standard for fitness is “not that high” but is “higher than bare relevance.” Will it help the trier of fact to understand the evidence or determine a fact in issue?
Plaintiff’s Motion to Preclude Experts:
Scott Lassman. “Scott Lassman’s expert testimony pertains to Plaintiff’s development, and eventual discontinuation of SHP616, a subcutaneous C1-INH product.” Plaintiff’s FDA expert, Susan Sensabaugh, testified that a company in plaintiff’s position would have had a reasonable expectation of filing the appropriate application and receiving FDA approval 12 months later. Ms. Sensabaugh’s testimony was thus relevant to plaintiff’s claim that defendant’s infringement delayed plaintiff’s release of its own product. Mr. Lassman’s testimony straddled the line between permissible and impermissible expert testimony. It is clear that experts may not render opinions on the defendants’ corporate state of mind. “Accordingly, I will grant Defendant’s motion to exclude any portion of Mr. Lassman’s testimony that comments on subjective motivations.”
Dr. Timothy Craig. Dr. Craig is currently a member of the Medical Advisory Board for the Hereditary Angioedema Association of America and has been providing clinical care and doing clinical research for HAE patients for over 20 years. “Dr. Craig was a principal clinical investigator in the Phase II and Phase III clinical trials that demonstrated the safety and efficacy of Haegarda.” Haegarda is the defendants’ alleged infringing product.
Dr. Craig’s Infringement Analysis:
- Use of straight line analysis. Plaintiff alleged flaws in Dr. Craig’s methodologies that plaintiff may explore through cross-examination. Plaintiff has made insufficient showing that Dr. Craig’s methodology is inherently unscientific or unreliable.
- Inclusion of data from ‘baseline’ blood level measurement. A dispute over interpretation of the data goes to the weight not admissibility.
- Inconsistency with claim construction. Neither party has ever sought clarification of the term “administration” and whether it refers to administration of one dose or many doses. Such an argument has no place in a Daubert
- Lack of familiarity of analysis. Plaintiff argued that defendant’s counsel made the graphs attached to Dr. Craig’s report and Dr. Craig “blindly accepted those graphs as accurate.” Such an opinion was sufficiently reliable for purposes of “An expert is permitted wide latitude to offer opinions, including those that are not based on firsthand knowledge or observation.”
Obviousness opinion. “Dr. Craig concludes that the method of treatment described in several claims of both the ‘788 patent and the ‘595 patent would have been obvious to a person of ordinary skill in the art.” Dr. Craig admitted an unfamiliarity with a prior art reference that is the cornerstone of his deposition of his obviousness opinions and that he would not ordinarily as a physician read formulation papers like Gatlin was alleged as a clear failure to satisfy the reliability and qualifications requirements of Rule 702. The court concurred with this observation and excluded Dr. Craig’s obviousness opinion to the extent that it relies on Gatlin.
Agency opinion. Plaintiff’s expert, Dr. Andrew MacGinnitie, opined that the administration of Haegarda indirectly infringes the patents-in-suit because defendant, “through SPNN, sells, offers to sell, and uses HAEGARDA and ‘administers HAEGARDA to HAE Patients according to the HAEGARDA Prescribing Information in an infringing manner.’” Dr. Craig is not an attorney and admits to not intending to offer any expertise on the contract. The court agreed with plaintiff that “Dr. Craig does not profess to have any legal expertise and experience, let alone any legal understanding of what constitutes an ‘agent’ under the law. He also does not purport to have any specialized experience with the particular SPNN contract.” Accordingly, the court will exclude this portion of his opinion.
Market share opinion. Dr. Craig offered an opinion of expanded market share based on his own experience with Haegarda on his own patient base. Although he has knowledge of his own patient base, plaintiff argued that he is not an economist and not an expert in the HAE market at large. As such, his experience as an “expert consumer” did not allow him to offer this opinion. “Based on that experience Dr. Craig is qualified to opine that he ‘believed’ or ‘expected’ that HAE prophylactic market would expand within the introduction of Haegarda and that the percentage of his HAE patients on prophylaxis therapy would increase to about 50%. I therefore deny Plaintiff’s motion to exclude this opinion.”
Dr. Lisbeth Illum. Dr. Illum, defendants’ formulation expert, opined on protein drug formulation and development. “Given Dr. Illum’s expertise in protein formulations, such testimony regarding the contribution of individuals at Sanquin to the conception of the asserted patents is permissible under Daubert.” The court denied plaintiff’s motion to exclude it.
However, Dr. Illum also offered opinions on a manufacturing and distribution agreement. She gave an opinion that, under that agreement, some of the “inventions” would be co-owned. Since she is not an attorney, Dr. Illum exceeded the bounds of her expertise and attempted to offer an impermissible legal conclusion. Accordingly, that testimony was excluded.
Nicholas Godici. Godici is a former patent examiner and commissioner. “He ultimately intends to opine on whether certain of Plaintiff’s conduct, if found to be true by a finder of fact, would support a finding of inequitable conduct.”
- Testimony regarding inequitable conduct: “Courts have generally excluded patent law expert testimony relating to inequitable conduct largely because such testimony frequently amounts to the proffering of impermissible legal opinions.” Mr. Godici ventured into that forbidden territory, as such any such testimony is excluded.
- Opinion regarding PTO’s limited resources: Godici described various limitations that could result in a patent examiner’s mistake in approving a patent. “[H]e seeks to talk only generally about practices that could undermine the presumption of validity set forth in 35 U.S.C. § 282. Such testimony is of limited probative value to Defendants and highly prejudicial to Plaintiff. While Defendants may present argument that the PTO is not perfect and may make a mistake—such as not reviewing certain prior art or considering invalidity arguments—Defendants may not put the imprimatur of an expert on such testimony. Accordingly, I will preclude Mr. Godici from offering these opinions.”
- Testimony regarding PTO procedures: While plaintiff admitted such testimony is admissible, it contended his explanation will not be relevant or helpful, i.e., it will not fit the case, particularly where the question of inequitable conduct will be before the court and not a jury. The court observed that his testimony will provide useful background on the PTO procedures and it showed no potential for prejudice and will therefore be admitted.
- Summary of file histories: Plaintiff objected to admission of any selective recitation of the prosecution history of the patents-in-suit. “In the absence of any fact witness who can present these file histories, Mr. Godici’s narration of this background, prosecution history, and inter partes review proceedings will serve to advance the trial.” Plaintiff believed there are flaws in Godici presentation, and the court ruled those objections can be raised in cross-examination at trial.
Dr. Christine Meyer. Meyer is the defendants’ damages expert to rebut the damages claim by plaintiff’s expert, Dr. Gregory Bell.
- Reliability of lost profits opinion: Meyer considered Adivo-generated documents, Adivo sales data, and Adivo switching data (i.e., switching of products by patients). The data used by Dr. Meyer was not based on forward-looking projections requiring multiple assumptions, but rather on fact-based historical sales and switching data. Defendants indicated the Advio information is the type defendants would use in the ordinary course of their business in making decisions about Haegard. Dr. Meyer indicated that she knows that the defendants have verified the reliability of the data. “Based on this testimony, I find that the data on which Dr. Meyer based her opinion is of a type reasonably relied upon by experts in the field.”
- Failure to produce data in discovery: Plaintiff alleged that Adivo data should not be allowed in testimony because it was not produced in discovery by defendants. The court decided that the Daubert motion is not the proper time to litigate the discovery issue. Further, at no point did plaintiff seek to litigate this dispute via a motion to compel or otherwise “bring the dispute to my attention.” The court noted that this is not an appropriate argument to raise in a Daubert
Defendants Motion to Preclude Experts:
Dr. Gregory Bell. Bell is plaintiff’s expert who opined as to the damages plaintiff suffered for lost profits and loss of reasonable royalties.
- Failure to apportion damages: “[E]ven when the accused infringing product is ‘the smallest salable unit, ‘the patentee ‘must do more to estimate what portion of the value of that product is attributable to the patented technology’ if the accused unit is ‘a multi-component product containing several non-infringing features with no relation to the patented feature.’” It is understood that this process may involve some degree of approximation and uncertainty. The patentee may rely on the “entire market rule … if the patentee demonstrates that ‘the patented feature creates the “basis for the customer demand” or “substantially create[s] the value of the component parts.”’” “According to Plaintiff, this case did not involve a ‘multi-component’ product that necessitates a separate apportionment analysis because the accused product is the pharmaceutical product itself.” The court determined that the conflicting arguments present a matter of competing expert opinion that are not appropriate for determination during a Daubert
- Bell’s opinion does satisfy apportionment requirements:
- Lost profits: The patentee must demonstrate that, “but for” the infringement, it would have made the infringer’s sales. For this motion, only the first Panduit factor was at issue. Dr. Bell understood that subcutaneous administration was the “central attribute” that drove demand of both Haegarda and the patents in-suit. “Defendants argument is nothing more than a dispute over facts and ‘reflects a fundamental confusion about the role of the court as a gatekeeper, under Daubert, to determine the admissibility of evidence, and the role of the jury, as a fact finder, to determine the weight to be accorded admitted evidence.’” The motion to preclude Dr. Bell’s lost profits opinion was denied.
- Reasonable royalty: Bell allegedly failed to account for patented versus unpatented features of Haegarda. The general rule is for royalties to be based on the smallest salable patent-producing unit and not on the entire product. “Dr. Bell’s report reveals that he works through each of the relevant Georgia-Pacific factors in order to opine on reasonable royalty.” “To the extent Defendants contend that Dr. Bell fails to opine on the portion of the realizable profit that should be credited to certain features such as price and weight-based dosing, such an argument is not the proper subject of a Daubert motion, as it turns on the resolution of a factual dispute— specifically, whether the features identified by Defendants are non-patented components that drive demand for Haegarda.” Any challenge to Dr. Bell’s independent knowledge about regulatory issues was proper for cross-examination and not for a Daubert challenge.
Mr. Robert Stoll. Mr. Stoll is a former commissioner of the PTO with significant experience. “Defendants now seek to exclude his testimony to the extent he intends to opine either on technical issues in which he is not a person of ordinary skill in the art, or on intents, motives, states of mind, or legal conclusions.”
- Technical issues: Defendants moved to exclude Stoll’s testimony to the extent he intends to testify as a technical expert. “Although Defendants criticize Mr. Stoll for relying on his understanding of chemistry, nothing in his testimony suggests that he based his opinions on solely his own technical knowledge rather than relying on the technical opinions of Plaintiff’s experts,” which was admissible.
- Opinions on intent, motive, states of mind, or legal conclusions: Some of Stoll’s testimony was responsive to testimony by Godici that has been excluded. As such, that responsive testimony was also excluded.
Dr. Bernard Trout. Dr. Trout testified as to formulations issues. “In addition, Dr. Trout opines that the administration of the inventions claimed in the patents-in-suit had ‘surprising and unexpected results.’”
- Scientific supportability of the unexpected results opinions. The arguments turned on the parties’ varying interpretation of the facts and whether such facts were scientifically sufficient to support a finding of nonobviousness. The Daubert reliability rules do not require the party proffering the expert to demonstrate the correctness of the opinion. The testimony was not thusly excluded.
- Qualification: “Stated simply, Dr. Trout stayed well within the bounds of his expertise to opine on the ‘surprising and unexpected’ nature of the results from the perspective of a person of ordinary skill in the art of pharmaceutical formulation.”
Conclusion. Motions were granted in part and denied in part (see above).
Maginnis v. Maginnis, 2021 Ky. App. Unpub. LEXIS 378 *; 2021 WL 2483877 (June 18, 2021)
An unpublished opinion from the Kentucky Court of Appeals provides important insight into the court’s thinking as to the goodwill analysis trial courts must perform under the applicable state law when valuing business entities. Under controlling Kentucky law, only enterprise goodwill is a marital asset subject to marital distribution.
Scope of Gaskill: During the marriage, the ex-spouses started a chimney business. The husband worked as a chimney sweep, and the wife performed other tasks, including bookkeeping. The valuation of the company was important both for marital distribution purposes and determining alimony to the wife.
The wife relied on expert testimony from a CPA whose testimony and expert report included statements that 70% of the company’s value was personal goodwill and 30% was enterprise goodwill. The trial court accepted this expert’s overall valuation. At the same time, in determining the value of marital assets for property distribution’s sake and calculating income for alimony’s sake, the trial court disregarded the expert’s goodwill allocation.
The husband appealed the court’s findings on a number of grounds, including assigning error to the trial court’s decision to ignore the opposing expert’s goodwill analysis.
The Court of Appeals sided with the husband. The reviewing court first noted that the controlling case is the state Supreme Court’s Gaskill v. Robbins decision, which involved the valuation of an oral surgery practice that was organized as a sole proprietorship. In Gaskill, the high court adopted the distinction between enterprise and personal goodwill. Under the facts of Gaskill, the court found: “[T]here can be little argument that the skill, personality, work ethic, reputation, and relationships developed by [the owner spouse/doctor] are hers alone and cannot be sold to a subsequent practitioner.” Further, “[t]o consider this highly personal value as marital would effectively attach [the owner’s] future earnings, to which [the nonowner spouse] has no claim.”
In the instant case, the Court of Appeals invalidated the trial court’s judgment on this ground.
Moreover, the Court of Appeals dismissed the wife’s argument that Gaskill did not apply here because Gaskill dealt with a professional business whereas the contested business was a nonprofessional entity. The appeals court said it knew of no authority that definitively addressed whether Gaskill applied to valuing professional and nonprofessional business entities alike.
But, according to the appeals court, “though the issue may more often arise when valuing a professional entity, we conclude that Gaskill also applies to valuing nonprofessional entities.” Here, ignoring the expert’s unrebutted goodwill conclusions resulted in an approximately $200,000 increase in the marital portion of the company’s value, the Court of Appeals noted. In remanding, the appeals court ordered the trial court either to accept the expert’s goodwill conclusions and make the requisite apportionment of value or reject the goodwill analysis and provide a good explanation for doing so.
Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021)
In a bitter buyout dispute involving a successful private family business and featuring two veteran appraisers, the Nebraska Supreme Court recently affirmed the district court’s decision to unreservedly credit the valuation testimony of the expert for the late majority shareholder. In contrast, the district court found the company’s expert’s valuations under various methods showed a “downward bias” that made the expert’s value conclusion unreliable.
Oppression claim: Streck Inc. was a worldwide industry leader in developing and manufacturing cell stabilization technology for use in hematology, immunology, and molecular diagnostics. Sales were strong and increasing every year since its creation, and it had no product recalls in the past 25 years. The company had long-lasting relationships with large customers and a valuable portfolio of intellectual property. Its financial performance surged in recent years, and it expected more growth in future years.
Streck was founded by Dr. Wayne Ryan, who, at the relevant time, owned over 52% of the company’s stock by way of a trust (RRT). However, one of his daughters came to own two-thirds of the company’s voting shares, enabling her to appoint a majority of the members of the board of directors. In September 2013, she replaced her father as CEO. She encouraged her father to retire. Dr. Ryan did not object to her becoming CEO as long as the company was sold. In 2014, the CEO took steps to sell the company.
According to a trial industry expert for RRT, the sales process was “flawed and failed.” Despite the company’s ongoing solid performance and a growing healthcare life sciences market, bids solicited by an investment banker on behalf of Streck were relatively low, which the expert found was due to growth projections that were too conservative and not properly explained to prospective buyers. The industry expert said the investment banker lacked experience in the appropriate market. Further, the company decided to exclude the highest bidder in the first round.
Dr. Ryan complained he was not listened to and could not approve the sale. The board and his daughter, as CEO, abandoned the process. RRT, representing Dr. Ryan (who died before trial), sued the daughter and Streck, alleging oppression and breach of fiduciary duty and asking for judicial dissolution of the company. Ultimately, Streck elected to buy RRT’s shares under the applicable statute, which triggered a fair value determination by the district court.
‘Dysfunctional’ sales process: Both sides’ experts were highly experienced appraisers and used the discounted cash flow (DCF) approach in combination with the guideline publicly traded company (GPTC) and guideline merger and acquisition (GMA) methods to determine the fair value of Dr. Ryan’s shares. In adopting RRT’s 74-page proposed findings verbatim, the district court wholly adopted the testimony of RRT’s industry and valuation experts. Regarding the DCF, the court said the appraiser’s revenue and income projections aligned with the company’s projections and prospects for growth; his growth rate was reasonable as were the selected company-size risk premium and company-specific risk premiums. Further, the expert, who applied a 14% S corp premium, “credibly and convincingly testified” that no rational company would convert from an S corp to a C corp prior to a sale. In contrast, the company’s expert gave “misleading and not credible” explanations for his projections and “double-counted” the same risks to justify his projections and company-specific risk premium, the court said. It noted this expert arrived at the same 14% S corp premium but decided to half it to account for the risk of the company becoming a C corp in the future. The district court found this adjustment was “arbitrary” and said it reflected the expert’s “downward bias.”
The company appealed, and, based on the parties’ request for bypass, the case went in front of the state Supreme Court, which affirmed. The high court said its de novo review of the record led to the conclusion that the district court’s valuation was reasonable and based in fact and principle.
A digest of Ryan Trust v. Ryan, 308 Neb. 851 (April 9, 2021), as well as the court’s opinion will be available soon at BVLaw.
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