USI Insurance Services, LLC v. Aitkin

IN THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF OREGON

USI INSURANCE SERVICES, LLC, a No. 3:21-cv-00267-HZ

foreign limited liability company, and

KIBBLE & PRENTICE HOLDING OPINION & ORDER

COMPANY, a foreign corporation

doing business as USI INSURANCE

SERVICES NORTHWEST,

Plaintiffs,

v.

MICHAEL AITKIN and ALLIANT

INSURANCE SERVICES INC.,

Defendants.

Lindsey D. G. Dates

Mariah A. Whitner

Barnes & Thornburg LLP

One N. Wacker Drive, Suite 4400

Chicago, IL 60606

Naomi Levelle Haslitt

Iván Resendiz Gutierrez

Miller Nash LLP

111 SW Fifth Avenue

Portland, OR 97204

Attorneys for Plaintiffs

Debra L. Fischer

Seth Gerber

Veronica Lew

Morgan, Lewis & Bockius LP

2049 Century Park East, Suite 700

Los Angeles, CA 90067

William S.T. Wood

Andrea R. Meyer

Sussman Shank, LLP

1000 SW Broadway, Suite 1400

Portland, OR 97205

Attorneys for Defendants

HERNÁNDEZ, District Judge:

Plaintiff USI Insurance Services, LLC and its subsidiary Kibble & Prentice Holding

Company, d/b/a USI Insurance Services Northwest (collectively “USI”) move to exclude

Defendants’ expert witness on damages Charles Wilhoite. Defendants Michael Aitkin and

Alliant Insurance Services, Inc. (“Alliant”) move to exclude Plaintiff’s damages expert Robert

Sly. For the reasons stated below, the Court denies Defendants’ motion and grants in part

Plaintiff’s motion.

BACKGROUND

Plaintiff USI brings claims against Defendant Michael Aitkin, a former employee of USI,

for breach of contract and against Aitkin’s current employer Alliant for intentional interference

with economic relations. Plaintiff claims that Defendant Aitkin breached his Employment

Agreement by soliciting, accepting, and diverting the business of his former USI clients on

behalf of and with the aid of Alliant. The case is scheduled to proceed to a jury trial on Plaintiff’s

claims.

Plaintiff has retained Robert S. Sly, Jr., ASA, MBA to testify at trial regarding monetary

damages suffered by USI due to clients it lost as a result of Aitkin’s alleged breach of contract

and Alliant’s alleged intentional interference with economic relations. Plaintiff has submitted

Sly’s Expert Report in which he calculates Plaintiff’s damages from business USI lost when

Aitkin’s former clients moved their accounts to Alliant. Wood Decl. Ex. 1, ECF 200-1.

Defendants object to Sly’s expert testimony and opinions, arguing that his “methodology is

fatally deficient and unreliable.” Def. Mot. to Exclude Expert Test. 2, ECF 199.

Defendants have retained Charles Wilhoite as a rebuttal expert on damages and have

provided his Expert Report, in which he provides four alternative damages calculations. Dates

Decl. Ex. A, ECF 202-1. Plaintiff objects to Wilhoite testifying on his first two alternative

calculations. Plaintiff also seeks to prohibit Wilhoite from offering opinions suggesting that

damages should be reduced for an “avoided commission expense.”

STANDARDS

Under Federal Rule of Evidence 702, a qualified expert witness may testify if: (a) the

expert's scientific, technical, or other specialized knowledge will help the trier of fact to

understand the evidence or to determine a fact in issue; (b) the testimony is based on sufficient

facts or data; (c) the testimony is the product of reliable principles and methods; and (d) the

expert has reliably applied the principles and methods to the facts of the case. Fed. R. Evid. 702.

The Court must exercise its gatekeeping function and ensure that expert testimony is “not only

relevant, but reliable.” Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 589 (1993). “Trial

judges are given broad discretion to determine whether Daubert’s specific factors are, or are not,

reasonable measures of reliability in a particular case.” United States v. Simmons, 470 F.3d 1115,

1123 (5th Cir. 2006) (citation omitted).

“Expert opinion testimony is relevant if the knowledge underlying it has a valid

connection to the pertinent inquiry.” City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1044

(9th Cir. 2014) (citation and quotation marks omitted); see also Est. of Barabin v. AstenJohnson,

Inc., 740 F.3d 457, 463 (9th Cir. 2014) (“Relevancy simply requires that [t]he evidence . . .

logically advance a material aspect of the party's case.”) (citation and quotation marks omitted)

(alterations in original). The reliability inquiry is a flexible one. Kumho Tire Co., Ltd. v.

Carmichael, 526 U.S. 137, 150–53 (1999) (finding that whether the Daubert factors are

“reasonable measures of reliability in a particular case is a matter that the law grants the trial

judge broad latitude to determine”). Expert testimony “is reliable if the knowledge underlying it

has a reliable basis in the knowledge and experience of the relevant discipline.” City of Pomona,

750 F.3d at 1044 (citation and quotation marks omitted).

“In evaluating proffered expert testimony, the trial court is a gatekeeper, not a fact

finder.” Id. at 1043 (citation and quotation marks omitted). “The test is not the correctness of the

expert's conclusions but the soundness of his methodology, and when an expert meets the

threshold established by Rule 702, the expert may testify and the fact finder decides how much

weight to give that testimony.” Id. at 1044 (citation and quotation marks omitted). Challenges to

the weight of the evidence and the expert's credibility are for a jury, not a trial judge, to evaluate.

Id.

DISCUSSION

I. Defendants’ Motion to Exclude Plaintiff’s Expert Testimony

Defendants do not contest Sly’s expertise or qualifications to render an expert opinion.

Rather, Defendants assert that the methodology Sly uses in his Expert Report to calculate

damages is flawed and unreliable. In determining the value of the book of business of USI’s lost

client accounts, Sly uses a market approach. Sly calculates the value of these accounts by

applying a multiple of earnings before interest, tax, depreciation, and amortization (“EBITDA”)

margin for accounts USI had acquired from its predecessor, CHS. Sly then researched publicly

available data from three separate sources on insurance brokerage acquisitions to determine a

range of multiples (11.0x, 12.0x, 13.0x, and 14.0x) to apply to the EBITDA margins. He then

calculated a range of damages by multiplying the EBITDA margins overall and for each

individual client account by the range of multiples he identified.

Defendants object to Sly’s methodology on several grounds. First, Defendants argue that

Sly’s comparative market approach methodology is unreliable because he did not check the

reasonableness of his calculations against a discounted cash flow (“DCF”) analysis. Relying on a

bankruptcy case from the Southern District of New York, Defendants argue that the DCF

analysis is the most reliable method for determining the value of a business. See Lippe v. Bairnco

Corp., 288 B.R. 678, 689 (S.D.N.Y. 2003) (“Many authorities recognize that the most reliable

method for determining the value of a business is the discounted cash flow (‘DCF’) method.”).

In Lippe, the court held that the DCF method should at least be used as “a check” on other

methods of calculation. Id. However, the Southern District of New York recognized in a later

case that “it would be wrong to conclude that there is a categorical requirement that any

valuation analysis be supported by DCF calculations.” Celebrity Cruises Inc. v. Essef Corp., 434

F. Supp. 2d 169, 179 (S.D.N.Y. 2006). And “the need for conducting a DCF analysis as a check

on other methods is not as critical in instances where the initial analysis is more trustworthy.” Id.

at 180.

Other courts have held that a market analysis is preferable to the DCF method of

valuation. See Metlyn Realty Corp. v. Esmark, Inc., 763 F.2d 826, 835 (7th Cir. 1985) (“The

value of a firm is just what it, or its assets, will fetch in the market.”). Courts have noted that a

DCF analysis is “highly sensitive to assumptions about . . . costs and rate of growth” and “[DCF]

studies may be necessary when there is no other way to find value, but they are not the best

way.” Id. at 836. In accord with the court’s reasoning in Metlyn Realty Corp., Sly justifies his

methodology by stating “[t]he market approach requires fewer subjective assumptions than

alternate valuation approaches[.]” Wood Decl. Ex. 1. The Court finds that Sly’s market approach

is a reasonable methodology to determine damages and falls within the industry standard for

valuation of lost client accounts. His failure to check his calculations using a DCF analysis does

not render his methodology unreliable under Federal Rule of Evidence 702.

Next, Defendants argue that Sly used the wrong revenue multiples in his damages

calculations. But Defendants do not adequately show why the multiples Sly chooses are

inappropriate. Although Defendants object to some of the inputs in his calculations, they do not

show that his methods are unreliable such that his testimony should be excluded. The

disagreement about which multiples should be used goes to the weight of his testimony, which a

jury must assess. See Brown v. Brewer, No. CV 06-3731-GHK (SHx), 2010 WL 2472182, at *28

(C.D. Cal. June 17, 2010) (“[T]he deviation from management’s projections, the use of an

arguably aggressive terminal multiple, and the alleged selection of the most profitable guideline

companies are proper subjects for cross-examination.”).

Lastly, Defendants claim that Sly calculated average EBITDA margins using data from

the wrong region—USI’s Mountain Region. Defendants note that all of Aitkin’s clients at the

time he left USI were in USI’s Northwest Region, which includes Oregon and Washington. But

all of USI’s accounts that Aitkin serviced were included in USI’s Mountain Region until a few

months before Aitkin resigned. Thus, the Court finds Sly’s use the Mountain Region’s EBIDTA

margin percentages to be reasonable.

The Court finds that Plaintiff’s expert witness has the appropriate specialized knowledge

to render an expert opinion. The methodology he used in his Expert Report is acceptable and was

applied appropriately. Defendants’ criticisms of the Expert Report are relevant to the weight of

Sly’s testimony but do not undermine the reliability of the methodology he used. Accordingly,

Defendants’ motion to exclude Sly’s expert testimony is denied.

II. Plaintiff’s Motion to Exclude Defendants’ Expert Testimony

In his Expert Report, Defendants’ expert Wilhoite provides four “alternative”

calculations of potential damages. Dates Decl. Ex. A. Plaintiff moves to exclude testimony on

Wilhoite’s first two alternative calculations. Plaintiff also seeks to prohibit Wilhoite from

offering opinions suggesting that damages should be reduced by an “avoided commission

expense.”

A. Alternative Damages Calculations

In his first alternative opinion, Wilhoite states: “Should the jury determine that there is no

liability and causation attributable to the Act, it is my opinion that the economic damages

suffered by USI are zero.” Dates Decl. Ex. A, at 8. Plaintiff argues that this statement is an

opinion on liability rather than an expert opinion on damages. But Wilhoite bases his opinion on

what he determines to be a normal client rate of attrition when an insurance broker leaves USI.

The Court finds that Wilhoite’s testimony about an expected client attrition rate is an appropriate

expert opinion, which will be subject to cross-examination at trial. So long as Wilhoite does not

testify about his opinion on Defendants’ liability, the Court declines to exclude his testimony.

In his second alternative opinion, Wilhoite provides a value of damages should the jury

determine that “the resulting damage is defined by the 18-month restrictive period” during which

Defendant Aitkin is prohibited from soliciting his former clients. Dates Decl. Ex. A, at 9-11.

Plaintiff seeks to exclude this testimony. Plaintiff argues that Wilhoite’s calculation that limits

damages to an 18-month period is too speculative because it assumes all the clients who left USI

for Alliant would have left anyway when the restrictive period ended. Defendant points to

several reasons why a jury could conclude that USI would have lost those clients very shortly

after the 18-month restriction period ended, including the fact that the clients had already left and

many expressed that they were dissatisfied with the service they received at USI. The Court finds

that Wilhoite may testify about the reasonableness of using an 18-month period to determine the

appropriate amount of damages if an 18-month limitation is typical based on his experience.

Wilhoite’s opinion is subject to cross-examination. But Wilhoite may not base his expert opinion

testimony on the Court’s holding that the restrictive covenants in Aitkin’s employment

agreement are enforceable up to 18 months.

With these limitations, Wilhoite may provide his expert opinion on his first two

alternative damages calculations. Plaintiff’s motion to exclude this potion of Defendants’ expert

witness testimony is denied.

B. Mitigation of Damages: “Avoided Commission Expense”

In his Expert Report, Wilhoite reduces the calculations in each of his four “alternative

calculations” by 20% for an “avoided commission expense.” Dates Decl. Ex. A, at 16-20.

Wilhoite opines that for each of Aitkin’s clients who took their business from USI to Alliant

when Aitkin resigned, USI reduced its costs by 20% of client revenue because it did not have to

pay a commission to Aitkin. He reasons that as a typical mitigation measure, USI would have

assigned Aitkin’s clients who remained at USI to brokers who charge a lower or no commission.

In his Expert Report, Wilhoite assigns this 20% cost savings to reduce damages for each of the

client accounts who left USI.

The Court finds that Wilhoite’s reasoning is flawed. Courts have recognized an “offset”

to damages in similar cases in which lost client accounts saved the plaintiff company from the

overhead expense of servicing those accounts. See Tersuli Constr. Servs., LLC v. Miletich, 13

Wash. App. 2d 1061, 2020 WL 3268044, at *10 (Wash. Ct. App. May 18, 2020). But here, any

savings that USI realized because it no longer had to pay a commission to Aitkin was unrelated

to clients who left. In other words, it was Aitkin’s departure that may have resulted in lower

expenses for USI, not the loss of his clients. Aitkin’s resignation from USI is not the subject of

the claims in this case. Rather, the claims are that he breached his contract, with the aid of

Alliant, by soliciting and accepting the business of his former USI clients. Because any lower

costs that may have been realized by USI are disconnected from the claims here, the Court

declines to allow Wilhoite’s inclusion of a 20% reduction for “avoided commission expense”

due to Aitkin’s departure.1 Plaintiff’s motion to exclude from Wilhoite’s expert testimony

reference to damages mitigation through an avoided commission expense is granted.

///

///

///

///

///

///

///

1 In its supplemental briefing, Defendants stipulate to excluding Wilhoite’s testimony on this

subject: “Unless Plaintiffs open the door at trial to issues concerning avoided expense

commission, Defendants’ damages expert, Charles A. Wilhoite, will not opine at trial concerning

the cost savings of plaintiffs by re-assigning remaining clients to employee-brokers/managers

who either receive a lower commission than the former producer who left the brokerage firm, or

no commission at all[.]” Def. Suppl. Resp. Pl. Mot. to Exclude 2, ECF 222.

CONCLUSION

The Court DENIES Defendants’ motion to exclude the testimony of Plaintiff’s expert

witness testimony [199]. The Court GRANTS in part and DENIES in part Plaintiff’s motion to

exclude Defendants’ expert witness testimony [201]. Specifically, the Court grants Plaintiff’s

motion to exclude testimony by Defendants’ expert about mitigation of damages through an

avoided commission expense. The Court otherwise denies Plaintiff’s motion.

IT IS SO ORDERED.

Dated __S__e_p_t_e_m_b_e__r _2_1_,_ 2_0_2_2______

MARCO A. HERNÁNDEZ

United States District Judge