PRUETTE v. EGAN-JONES RATINGS COMPANY

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

CHRISTOPHER PRUETTE and STEVEN :

PRUETTE, trading as INSEARCH :

PARTNERS, :

: CIVIL ACTION

Plaintiffs, :

No. 18-3734

:

v. :

:

EGAN-JONES RATINGS COMPANY,

:

Defendant.

MEMORANDUM OPINION

SCHMEHL, J. /S/ JLS MAY 9, 2024

I. INTRODUCTION

The instant matter is brought by Plaintiffs, Christopher Pruette and Steven Pruette,

trading as InSearch Partners (“ISP”) against Defendant, Egan Jones Ratings Company (“EJR”),

seeking damages for breach of an oral contract that was allegedly entered into between the two

parties in 2002. This Court previously entered summary judgment in favor of ISP as to liability,

and ISP later filed the instant motion, seeking a grant of summary judgment as to damages only.

In support of this motion, ISP offers the testimony of Christopher Pruette, and seeks damages in

the form of lost commissions as well as damages for future lost commissions.

II. PROCEDURAL HISTORY

ISP commenced an arbitration proceeding against EJR in January of 2015. The

arbitration was bifurcated into separate liability and damages phases, and following a hearing,

the arbitrator entered a “partial final” arbitral award finding that EJR was liable for having

breached an exclusive distribution agreement entered into between the parties in 1998. EJR then

filed a petition in this Court pursuant to the Federal Arbitration Act to vacate this arbitral award.

This Court found that it had jurisdiction over the “partial final” award and confirmed the arbitral

award finding liability of behalf of EJR. This opinion was affirmed by the Third Circuit on

September 25, 2018.

A second arbitration hearing was held on damages and an award was issued that

determined the amount of damages to which ISP was entitled because of EJR’s breach of the

1998 Agreement. This Court confirmed the damages award as issued by the arbitrator, then

amended its ruling to confirm that the judgment included an amount separately awarded by the

arbitrator as sanctions against EJR, and to impose prejudgment interest at a rate of 6 percent per

annum. The judgment was appealed to the Third Circuit by EJR, but the parties settled their

differences over the amount owed to ISP for breach of the 1998 Agreement during the pendency

of the appeal.

The instant matter was initiated in 2018, after the arbitrator ruled that an oral contract

between the two parties was not arbitrable. The oral contract at issue here involves a separate

oral agreement, entered into in 2002 between ISP and EJR, adopting the provisions of the 1998

written agreement for ratings sales distribution for use in sales of proxy services. The Court

previously denied EJR’s motion for summary judgment and granted ISP’s motion for partial

summary judgment on liability issues, leaving the determination of the amount of damages to

which ISP is entitled for later determination. Thereafter, ISP filed the instant motion, seeking

summary judgment as to the amount of damages it claims to be owed from EJR due to its breach

of the 2002 oral agreement. ISP claims that it is entitled to $3,062,962.08. In response, EJR

claims ISP is entitled to only $87,124.

I first note that although it filed an opposition to ISP’s Motion for Summary Judgment,

EJR did not file a statement of material facts, nor present any conflicting facts to those set forth

by ISP. For the reasons set forth below, I will grant Plaintiff’s motion for summary judgment in

part and deny it in part.

III. FACTUAL BACKGROUND

The relationship between the parties commenced in 1998, when Steven Pruette agreed in

writing with Sean Egan that ISP would begin distributing EJR’s ratings subscription service to

potential customers active in financial services businesses on an exclusive basis. Four years later,

the parties orally agreed that EJR would produce, and ISP would distribute, proxy services on the

same basis as the ratings service. (C. Pruette Affidavit, Docket No. 60-2, ¶ 3.) In their dealings

with each other, ISP and EJR utilized the same general methodology, regardless of whether ISP

was selling ratings services or proxy services. (Id., ¶ 10.) On a roughly monthly basis,

commissions for completed sales would be dispersed to ISP in the form of a single check from

EJR. (Id.) The amount of this check would equal the total value of all commissions on ratings

services sales and proxy service sales completed within the relevant time. (Id.) The emails,

accounts receivable reports and the aging reports relating to the parties’ relationship commingled

references to ratings services and proxy services. (Id.)

Eventually, EJR was granted a NRSRO (Nationally Recognized Statistical Rating

Organization) license by the SEC. (Id., ¶ 11.) As a condition to issuance of this license, the SEC

required centralized invoicing with serialized invoice numbers. (Id.) Even using this new

procedure, ratings and proxy service account records remained commingled. (Id., ¶ 12.)

Christopher Pruette examined the documentation produced by EJR in discovery to

perform a calculation of damages. Mr. Pruette worked with his father, Steven Pruette, as ISP,

distributing EJR products. Working with the controller at EJR, Pruette developed and

standardized the accounting format and the scope of the individual reports that identified sales

made by ISP. (Pruette report, Docket No. 60-3, p. 2.) Pruette also calculated the amounts of

commissions earned by ISP on those sales, confirmed the amounts and nature of each payment

received by EJR with the invoices that he sent out and recorded in the sales data. (Id.) Pruette

also developed forms of spreadsheets aggregating and analyzing these data by date, by customer,

and by the duration of the customer relationship. (Id.) Pruette states that as of 2014, EJR had

never substantially changed these forms that he had developed. (Id.) Based upon the

documentation produced by EJR in discovery in this matter, and relying on his knowledge of

EJR’s forms and accounting practices, Pruette developed a damages report. In that report, Pruette

states that ISP’s damages claim in this matter has two components: compensation for EJR’s

failure to have made contractually required commission payments, and compensation for EJR’s

destruction of ISP’s business by improperly depriving it of all revenue. (Pruette report, p. 3.)

Based upon his calculations, Pruette claims ISP is entitled to the following:

a. $1,391,524 in unpaid commissions from 2015 to the end of 2022 plus interest at

six percent as of 12/31/2022. (Pruette affidavit, Docket No. 60-2, ¶ 16, 22, 23.)

b. $1,450,190 in present value of future commissions ¶(Id., ¶¶ 17, 18.)

c. $ 160,678 in concealed 2012-2014 Sales-based commissions for Broadridge plus

interest (Id., ¶¶ 19-21; Pruette Supp. Report, Docket No. 60-4, p. 1.)

IV. LEGAL STANDARD

On a motion for summary judgment, the court must consider the “underlying facts and all

reasonable inferences therefrom in the light most favorable to the party opposing the motion.”

Slagle v. Cnty. of Clarion, 435 F.3d 262, 264 (3d Cir. 2006) (citations omitted). Summary

judgment is proper when there is no genuine dispute of material fact and the movant is entitled to

a judgment as a matter of law. Fed. R. Civ. P. 56(a). “Facts that could alter the outcome are

‘material facts,’ and disputes are ‘genuine’ if evidence exists from which a rational person could

conclude that the position of the person with the burden of proof on the disputed issue is correct.”

EBC, Inc. v. Clark Bldg. Sys., Inc., 618 F.3d 253, 262 (3d Cir. 2010) (quoting Clark v. Modern

Grp. Ltd., 9 F.3d 321, 326 (3d Cir. 1993)).

If the movant carries its initial burden of showing the basis of its motion, the burden shifts

to the non-moving party to go beyond the pleadings and point to “specific facts showing that a

genuine issue exists for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986). In other

words, the non-moving party “must present more than just bare assertions, conclusory allegations

or suspicions to show the existence of a genuine issue.” Podobnik v. US. Postal Serv., 409 F.3d

584, 594 (3d Cir. 2005) (citation and internal quotation marks omitted). Summary judgment must

be granted against a non-moving party who fails to sufficiently “establish the existence of an

essential element of its case on which it bears the burden of proof at trial.” Blunt v. Lower Merion

Sch. Dist., 767 F.3d 247, 265 (3d Cir. 2014).

V. DISCUSSION

In addressing ISP’s motion for summary judgment, I first must decide if the relevant

terms of the 2002 oral agreement mirror the terms of the 1998 written agreement. At the

February 10, 2016, arbitration in this matter, Steven Pruette testified that ISP was the only

distributor of EJR’s proxy services, and that ISP sold EJR’s proxy services “in a similar fashion”

that ISP had sold all of EJR’s products. (W. Bronner affidavit, Docket No. 60-1, p.2.) Steven

Pruette also testified that the 2002 agreement to sell proxy services was not written, but that the

parties “had an oral agreement that we would operate under the same agreement that we had for

credit research.” (W. Bronner affidavit, p. 2.) Later in the same proceeding, the arbitrator

requested a clarification of the terms of oral agreement, and Steven Pruette agreed that the 2002

verbal agreement required proxy services to be treated the same as the credit research agreement.

(Id.)

Further, Christopher Pruette’s affidavit in this matter stated that the oral contract, agreed

upon in 2002, followed the form of the written contract entered into in 1998 and governed the

sales of proxy services. (Pruette affidavit, ¶3.) Pruette also testified that in terms of the

accounting process that was used, “the same general methodology would be utilized, regardless

of whether ISP was selling a ratings service subscription or a proxy service.” (Id., ¶10.) Further,

“the emails, the accounts receivables reports, and the aging reports constituting or accompanying

these communications indiscriminatingly commingled references to ratings and proxy services.”

(Id.)

Also, I note that EJR submitted absolutely no evidence, nor does it argue, that the terms

of the 2002 oral agreement did not mirror the terms of the 1998 written agreement. Accordingly,

there is no genuine issue of material fact that the 2002 oral agreement contained the same terms

as the 1998 written agreement. These terms include the same commission structure and the same

exclusivity provision that made ISP the exclusive distributor of EJR’s ratings service and proxy

service. As I found in my September 29, 2021, Order on Plaintiffs’ Motion for Partial Summary

Judgment (Docket No 42), “if Plaintiffs [could] prove that the 2002 Agreement contains the

same contractual language as the 1998 Agreement, Defendant shall not argue that its cessation of

payments for commissions on sales of proxy services was not a breach of the proxy services

distribution agreement nor shall it argue that appointing itself as the successor distributor of the

proxy services in question was not a breach of the proxy services distribution agreement.” As I

found above that ISP proved that the contractual terms of the 2002 agreement mirror the terms of

the 1998 agreement, it is established that EJR breached the 2002 oral agreement by ceasing to

pay commissions on sales of its proxy services1. Accordingly, all that is left is to determine the

amount of damages to which ISP is entitled because of EJR’s breach.2

To calculate the damages to which it is entitled, ISP submitted the report and

supplement report of Christopher Pruette, as discussed above. ISP submits this report pursuant to

Fed. R. Evid. 701, which allows a lay witness to testify regarding matters about which he or she

is knowledgeable, so long as the witness does not submit an opinion that involves specialized

knowledge within the scope of Fed. R. Evid. 702. Specifically, Rule 701 states as follows:

If a witness is not testifying as an expert, testimony in the form of an opinion is

limited to one that is:

(a) rationally based on the witness’s perception;

(b) helpful to clearly understanding the witness’s testimony or to determining a

fact in issue; and

(c) not based on scientific, technical, or other specialized knowledge within the

scope of Rule 702.

Fed. R. Evid. 701.

ISP argues that the affidavit of Pruette which testifies about the contents of his report and

supplemental report is appropriate under Rule 701 because ISP “relies directly on the data

obtained from EJR, not on its own conclusions about the data.” (ISP Brief, Docket No. 60-6, p.

12.) EJR opposes the use of Pruette’s testimony under Rule 701, claiming that he is not entitled

to provide opinion evidence on damages, that the submission of lay non-expert opinion

1 I note that in its opposition to ISP’s Motion, EJR states that it “concedes that under the terms of the 1998

Agreement, Plaintiffs may be entitled to commissions.” (EJR Brief, Docket no. 64, p. 3.) EJR then claims these

commissions are limited to sales by ISP prior to 2014 which customers remained clients of EJR after 2014 and

calculates this amount at $87,140. (Id.)

2 I also note that EJR brought a counterclaim against ISP in its initial pleading, claiming that Plaintiffs were

overpaid some commission amounts. As of the date of this opinion, EJR has not argued that it is entitled to damages

from ISP in this matter. Rather, as discussed above, EJR submitted an affidavit admitting that it owes ISP $87,140.

testimony under Rule 701 must be based on the witness’s own perceptions, and that the

“opinions offered by Pruette are not based on his own perceptions but upon review of EJR’s

records.” (EJR Brief, Docket No. 62, p. 12.) EJR claims that although the Third Circuit has held

that a lay opinion may be admissible based upon review of business records, the review of

records must have been in a witness’ corporate capacity, citing to Teen-Ed, Inc. v. Kimball Int’l,

Inc., 620 F.2d 399, 403-404 (3d Cir. 1980). However, a review of this case shows that it does not

stand for the proposition for which EJR cited it. Rather, the Court in Teen-Ed stated that “[t]he

modern trend favors the admission of opinion testimony, provided that it is well founded on

personal knowledge and susceptible to specific cross-examination.” Teen-Ed., Inc. v. Kimball

Int’l, Inc. 620 F.3d at 403. That is exactly the situation set forth in the instant matter. EJR and

ISP both created and maintained the records that Pruette later analyzed, and Pruette was the one

initially tasked with the creation and maintenance of those records. Clearly, Pruette was

intimately familiar with and had personal knowledge of the EJR records that he reviewed to

author his report. Further, he was extensively cross-examined by EJR about his opinion, and EJR

does not attempt to show any miscalculation or error in the Pruette report. I find Christopher

Pruette is qualified to give lay opinion testimony regarding unpaid commissions and interest

based upon his review of EJR records during this litigation.

In reviewing Pruette’s report, supplemental report, and affidavit, he is seeking damages

for unpaid 2015-2022 commissions, unpaid 2012-2014 Broadridge sales-based commissions that

were concealed by EJR and future lost commissions. I will examine each type of damages in

turn.

As to unpaid commissions from 2015 to 2022, I find ISP is entitled to the amount of

$1,391,541.54 which represents unpaid commissions and interest, as calculated by Pruette after

his review of EJR records. ISP is also entitled to unpaid commissions for 2023 and interest, and

upon calculation and submission to the Court by ISP, this additional amount will also be

awarded. As to the amount ISP claims for the allegedly concealed Broadridge sales, I find ISP is

entitled to an award of $160,678.17, as calculated by the Pruette report3.

However, I do take issue with an award of future commissions to ISP as calculated by

Pruette. In his affidavit claiming ISP’s entitlement to such damages, Pruette states “I have acted

in the belief that the proper measure of the value of the distribution business that EJR destroyed

by nonpayment of commissions, in light of the contractual and other disincentives to termination,

is equal to the present value of the reasonably anticipated future income stream, assuming

payment of all future commissions at the contractual rates. As of 1/1/2023, the projected total

sales revenue, and resulting commission revenue over the next 10 years, by extrapolation from

the steady and predictable sales growth experience for a number of years, is $2,297.667.”

(Pruette affidavit, ¶17.)

I found Pruette had sufficient particularized knowledge of EJR’s records to provide

opinion testimony pursuant to Fed. R. Evid. 701(a) regarding unpaid commissions and interest.

His particularized knowledge must, however, “provide a truly rational basis for his or her

opinion” and that basis cannot stray into the realm of expert testimony. See Asplundh Mgf. Div.,

a Div. of Asplundh Tree Expert Co. v. Benton Harbor Engineering, 57 F.3d 1190, 1201 (3d Cir.

1995.) Subsection (c) was added to Rule 701 in 2000 to help clarify the distinction between lay

and expert testimony to “eliminate the risk that the reliability requirements set forth in Rule 702

3 I note that EJR fails to argue that these Broadridge sales did not occur, that they were not concealed or

that payments for them were not withheld from ISP. Rather, EJR argues that the Pennsylvania statute of limitations

of four years for fraud bars this claim. However, there is no genuine issue of material fact as to whether ISP acted

diligently once it became aware of the concealment of the 2012-2015 Broadridge sales. Accordingly, this argument

must fail.

will be evaded through the simple expedient of proffering an expert in lay witness clothing.” See

Notes to 2000 Amendments. While expert testimony “results from a process of reasoning which

can be mastered only by specialists in the field,” 701(c) demands that lay testimony be grounded

on “process[es] of reasoning familiar in everyday life.” Notes to 2000 Amendments (quotations

and citations omitted); see also United States v. Garcia, 413 F.3d 201, 215 (2d Cir. 2005) (“[I]n

considering the third prerequisite for lay opinion testimony, a court must focus on the ‘reasoning

process’ by which a witness reached his proffered opinion.”). If the “rational basis” upon which

a lay opinion is based would prove inaccessible to “a person of average intelligence,” it will not

qualify as lay testimony. See United States v. Kale, 445 Fed.Appx. 482, 485 (3d Cir. 2011); see

also Donlin v. Philips Lighting North America Corp., 581 F.3d 73, 82 (3d Cir. 2009)(finding

“tasks such as calculating life-expectancy, assessing amortization rates... or calculating earnings

potential in a pension portfolio” complex enough to require expert testimony). “Such technical

testimony, though perhaps based upon a witness's particularized knowledge of a technical or

specialized subject, nevertheless too closely resembles the sort of complex, hypothetical

speculation characteristic of expert testimony.” Acosta v. Cent. Laundry, Inc., 273 F. Supp. 3d

553, 556–57 (E.D. Pa. 2017.)

I find Pruette’s calculation of the “distribution business that EJR destroyed by

nonpayment of commissions” (Pruette affidavit, ¶ 17) is inadmissible as lay opinion testimony

under Rule 701 (c), as the “rational basis” upon which his opinion on this issue is based is not

accessible to “a person of average intelligence.” See United States v. Kale, 445 Fed. Appx. At

485. Pruette’s calculation of future commissions is technical, complex, and hypothetical, not a

“process of reasoning based in everyday life.” Pruette may have knowledge of the commission

numbers from his familiarity with EJR’s records, but the calculation he performs in his attempt

to calculate lost future commissions owed to ISP is properly the subject of expert testimony, as it

is too complex to be left to lay opinion testimony. Accordingly, I find that there is a genuine

issue of material fact as to the amounts to which ISP is entitled for future commissions.

V. CONCLUSION

For all the above reasons, ISP’s motion for summary judgment is granted in part and

denied in part. The motion is granted to the extent it seeks the amount of unpaid commissions

from 2015 to 2022 plus interest as calculated by Pruette, unpaid commissions from January 1,

2023 to the date of this opinion, as well as the 2012-2014 concealed Broadridge commissions as

set forth in Pruette’s report. The motion is denied to the extent ISP seeks an award of damages

for future commissions. If ISP wishes to claim future lost commissions from EJR, ISP must

produce a qualified expert pursuant to Fed. R. Evid. 702. Further, if EJR intends to proceed with

its counterclaim in this matter in light of this opinion, it must advise the Court of such in writing.

An appropriate order follows.