Safety Test & Equip. Co. v. Am. Safety Util. Corp.

Safety Test & Equip. Co. v. Am. Safety Util. Corp., 2016 NCBC 98.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE

SUPERIOR COURT DIVISION

COUNTY OF CLEVELAND 13 CVS 1037

SAFETY TEST & EQUIPMENT )

COMPANY, INC., )

)

Plaintiff, )

)

v. )

)

ORDER & OPINION ON MOTION

AMERICAN SAFETY UTILITY )

TO EXCLUDE EXPERT TESTIMONY

CORPORATION; CHARLES R. )

PRICE; CHARLES A. PRICE; JOHN )

E. HAMRICK; and CHRISTOPHER T. )

MCMAHAN, )

)

Defendants. )

)

1. THIS MATTER is before the Court on Defendants’ Motion to Exclude

Testimony of Plaintiff’s Expert J.C. Poindexter (“Motion”) pursuant to Rules 702 and

403 of the North Carolina Rules of Evidence. For the reasons explained below, the

Motion is GRANTED IN PART and DENIED IN PART.

Enns & Archer LLP, by Rodrick J. Enns, and Lincoln Derr PLLC, by Sara R.

Lincoln, for Plaintiff.

Smith Moore Leatherwood LLP, by J. Douglas Grimes and Richard A.

Coughlin, for Defendants.

Gale, Chief Judge.

I. INTRODUCTION AND BACKGROUND

2. This case, set for trial in February 2017, has involved substantial motion

practice. The Court provided a detailed statement of the factual background and

procedural history in its ruling on Defendants’ Motion for Summary Judgment (the

“April 2015 Decision”). See Safety Test & Equip. Co. v. Am. Safety Util. Corp., No.

13-CVS-1037, 2015 NCBC LEXIS 40, at *3–20 (N.C. Super. Ct. Apr. 23, 2015).

3. Safety Test & Equipment Company, Inc. (“Safety Test”) initiated this

action on June 12, 2013, alleging claims of misappropriation of trade secrets,

defamation, interference with prospective contractual relations, civil conspiracy, and

violations of N.C. Gen. Stat. § 75-1.1 (2015). The case was designated a mandatory

complex business case on June 13, 2013, and assigned to the undersigned on June 19,

2013.

4. The litigation arises from Safety Test’s claim that American Safety

Utility Corporation (“ASUC”)—a competitor of Safety Test’s—hired former Safety

Test employees John E. Hamrick (“Hamrick”) and Christopher T. McMahan

(“McMahan”) in 2011 and 2012 and induced them to misappropriate Safety Test’s

trade secrets.

5. In its April 2015 Decision, the Court found adequate evidence to allow

the trade-secret-misappropriation claim to survive summary judgment as to three

categories of information: (1) Safety Test’s supplier pricing, (2) a business strategy of

Safety Test’s referred to as “OEM sourcing,” and (3) Safety Test’s historical customer

pricing. The defamation claim was voluntarily dismissed, and the remaining claims

survive but are dependent on the trade-secret-misappropriation claim.

II. SUMMARY OF THE MOTION

6. The testimony of forensic-economics expert Dr. J.C. Poindexter is

critical to Safety Test’s case on damages.

7. The Motion seeks to exclude Dr. Poindexter’s testimony in its entirety.

Alternatively, Defendants move to exclude the portions of Dr. Poindexter’s opinions

that they allege are not sufficiently relevant or reliable, or are otherwise unduly

prejudicial.

8. The Motion presents the specific issue of whether Dr. Poindexter may

opine as to certain economic circumstances without intending to present or having

demonstrated an adequate basis to present an opinion on liability or causation arising

from Safety Test’s evidence of alleged trade-secret misappropriation.

9. Dr. Poindexter has prepared reports that state opinions relating to

(1) his assessment and projection of sales and profits for certain customers before and

after ASUC hired Hamrick and McMahan that he refers to as “diverted sales,” and

(2) his view that, before ASUC hired Hamrick and McMahan, ASUC was facing

insolvency because of continuing losses in equity value.

10. Safety Test proposes that this testimony is among the circumstantial

evidence from which a jury may conclude first, that there was trade-secret

misappropriation, and second, that Safety Test suffered economic injury or that

ASUC was unjustly enriched because of that misappropriation. Safety Test is

steadfast in its representation that Dr. Poindexter has not been, and will not be,

asked to opine as to specific damages that Safety Test has suffered from such trade-

secret misappropriation. Rather, Safety Test contends that Dr. Poindexter’s

testimony is both a proper subject of expert testimony to assist the jury in its

determination and an appropriate basis of circumstantial evidence from which a jury

may infer misappropriation and determine what damages should be assessed.

11. In summary, Defendants contend that Dr. Poindexter’s methods of

projecting sales and profits are unreliable because an expert who seeks to opine on

damages caused by trade-secret misappropriation must consider and account for

market forces other than the alleged misappropriation that could be alternative

causes for increases or declines in sales or profits. To the extent that Dr. Poindexter

seeks to express an opinion on sales or profits before and after ASUC hired Hamrick

and McMahan, without assigning changes to any particular factor, Defendants argue

that such testimony first is an improper subject of expert testimony, second is

unreliable, and third is highly prejudicial.

12. To resolve the Motion, the Court must assess the reliability of Dr.

Poindexter’s reports and proposed testimony under Rule 702 of the North Carolina

Rules of Evidence. Assuming that the reports and testimony pass muster under Rule

702(a), the Court must further assess the relative relevance and prejudice of Dr.

Poindexter’s opinions under Rules 402 and 403.

III. LEGAL STANDARDS

A. The Admissibility of Expert Testimony

13. Rule 702(a) of the North Carolina Rules of Evidence is now virtually

identical to its federal counterpart and follows the Daubert standard for admitting

expert testimony. See State v. McGrady, 368 N.C. 880, 884, 787 S.E.2d 1, 5 (2016)

(“We hold that the 2011 amendment [to North Carolina’s Rule 702] adopts the federal

standard for the admission of expert witness testimony articulated in the Daubert

line of cases. . . . [and] mirrors that of the amended federal rule.”); see also id. at 892,

787 S.E.2d at 10 (noting that “[t]he 2011 amendment to Rule 702(a) did not change

the basic structure of the inquiry,” but that it “did change the level of rigor that our

courts must use to scrutinize expert testimony before admitting it”).

14. Rule 702(a) has three main parts that must be satisfied for expert

testimony to be admissible.

15. First, the testimony must be relevant. Expert testimony is relevant if it

is based on “scientific, technical, or other specialized knowledge [that] will assist the

trier of fact to understand the evidence or determine a fact in issue.” N.C. Gen. Stat.

§ 8C-1, Rule 702(a) (2015). The testimony must go beyond meeting the minimum

standard for logical relevance established by Rule 401; it must “assist the trier of fact”

by providing “insight beyond the conclusions that jurors can readily draw from their

own experiences,” and “do more than invite the jury to ‘substitut[e] [the expert’s]

judgment of the meaning of the facts of the case’ for its own.” McGrady, 368 N.C. at

889, 787 S.E.2d at 8 (first quoting N.C. Gen. Stat. § 8C-1, Rule 702(a); then quoting

Burrell v. Sparkkles Reconstruction Co., 189 N.C. App. 104, 114, 657 S.E.2d 712, 719

(2008)).

16. Second, the witness must be “qualified as an expert by knowledge, skill,

experience, training, or education.” N.C. Gen. Stat. § 8C-1, Rule 702(a).

17. Third, the testimony must be reliable. An expert’s opinion is reliable if

all the following criteria are met:

 “[t]he testimony is based upon sufficient facts or data,”

 “[t]he testimony is the product of reliable principles and methods,”

and

 “[t]he witness has applied the principles and methods reliably to the

facts of the case.”

Id. § 8C-1, Rule 702(a)(1)–(3).

18. To determine whether expert testimony is reliable, “[t]he primary focus

of the inquiry is on the reliability of the witness’s principles and methodology, ‘not on

the conclusions that they generate.’” McGrady, 368 N.C. at 890, 787 S.E.2d at 9 (first

citing Gen. Elec. Co. v. Joiner, 522 U.S. 136, 146 (1997); then quoting Daubert v.

Merrell Dow Pharm., Inc., 509 U.S. 579, 595 (1993)). As the Supreme Court of North

Carolina has explained, “the trial court should use those factors that it believes will

best help it determine whether the testimony is reliable in the three ways described

in the text of Rule 702(a)(1) to (a)(3).” Id.

19. In exercising its “gatekeeping role” to ensure that expert testimony

meets the criteria set forth above, the Court must be mindful of other applicable rules.

Daubert, 509 U.S. at 595, 597. Rule 403 permits the exclusion of relevant evidence

when the “probative value [of the evidence] is substantially outweighed by the danger

of unfair prejudice, confusion of the issues, or misleading the jury.” N.C. Gen. Stat.

§ 8C-1, Rule 403; see also Daubert, 509 U.S. at 595 (“Expert evidence can be both

powerful and quite misleading because of the difficulty in evaluating it. Because of

this risk, the judge in weighing possible prejudice against probative force under Rule

403 . . . exercises more control over experts than over lay witnesses.” (quoting Jack

B. Weinstein, Rule 702 of the Federal Rules of Evidence Is Sound; It Should Not Be

Amended, 138 F.R.D. 631, 632 (1991))).

B. Damages for Misappropriation of Trade Secrets

20. Safety Test intends to have Dr. Poindexter testify as to certain economic

circumstances that Safety Test contends, combined with other evidence, provides an

adequate combination of direct and circumstantial evidence to allow a jury to find

that Safety Test has satisfied its statutory burden of showing that Defendants have

misappropriated Safety Test’s trade secrets, and either that Safety Test has suffered

financial loss as a result of that misappropriation, or that Defendants have been

unjustly enriched.

21. A plaintiff who succeeds in proving a claim of misappropriation of trade

secrets may recover actual damages measured by the greater of economic loss

suffered by the plaintiff, or unjust enrichment enjoyed by the defendant as a result of

the misappropriation. N.C. Gen. Stat. § 66-154(b) (2015).

22. The North Carolina Pattern Jury Instructions, consistent with the law

of proximate cause for other causes of action, directs that a plaintiff must prove only

that the defendant’s misappropriation of the plaintiff’s trade secret was a proximate

cause, not the sole cause, of the plaintiff’s economic loss or unjust enrichment. N.C.

Pattern Jury Instructions–Civil 813.96.

23. Damages are to be reasonably determined from the evidence presented

in the case, and must be based on evidence that shows the amount of actual damages

with reasonable certainty. See Olivetti Corp. v. Ames Bus. Sys., Inc., 319 N.C. 534,

547–48, 356 S.E.2d 578, 586 (1987); Med. Staffing Network, Inc. v. Ridgway, 194 N.C.

App. 649, 660, 670 S.E.2d 321, 330 (2009); N.C. Pattern Jury Instructions–Civil

813.98. While absolute certainty as to the amount of actual damages is not required,

there must be “something more than ‘hypothetical or speculative forecasts.’” Med.

Staffing Network, 194 N.C. App. at 660, 670 S.E.2d at 330 (quoting S. Bldg. Maint.,

Inc. v. Osborne, 127 N.C. App. 327, 332, 489 S.E.2d 892, 896 (1997)); see also Castle

McCulloch, Inc. v. Freedman, 169 N.C. App. 497, 501, 610 S.E.2d 416, 420 (“North

Carolina courts have long held that damages for lost profits will not be awarded based

upon hypothetical or speculative forecasts of losses.” (quoting Iron Steamer, Ltd. v.

Trinity Rest., Inc., 110 N.C. App. 843, 847, 431, S.E.2d 767, 770 (1993))), aff’d, 360

N.C. 57, 620 S.E.2d 674 (2005); N.C. Pattern Jury Instructions–Civil 813.98.

24. Where the evidence demonstrates that multiple reasons unrelated to the

defendant’s trade-secret misappropriation might account for or contribute to the

plaintiff’s economic losses or the defendant’s unjust enrichment, it would be

inappropriate for an expert to present an opinion of damages based only on the

assumption, without analysis, that all the plaintiff’s economic loss or all the

defendant’s economic gain was caused by the defendant’s alleged wrongful

misappropriation. Med. Staffing Network, 194 N.C. App. at 660–61, 670 S.Ed.2d at

330 (citing Olivetti, 319 N.C. at 548, 356 S.E.2d at 587). Otherwise, an expert’s

opinion would rest on a “faulty premise.” Id. at 661, 670 S.E.2d at 330. This is

because the ultimate determination of damages must take into account all relevant

factors when determining a final value that is reasonably certain. Id. (citing

McNamara v. Wilmington Mall Realty Corp., 121 N.C. App. 400, 411–12, 466 S.E.2d

324, 332 (1976)).

25. Likewise, an expert opinion expressing that certain economic losses or

gains were caused by the defendant’s misappropriation of trade secrets rests on a

faulty premise if the opinion rests entirely on the assumption that losses or gains

were due solely to the alleged misappropriation, without further evidentiary analysis

that supports that assumption. See, e.g., Polyzen, Inc. v. RadiaDyne, LLC, No. 5:11-

CV-662-D, 2016 U.S. Dist. LEXIS 130888, at *38–39 (E.D.N.C. Sept. 23, 2016), appeal

docketed, No. 17-1174 (Fed. Cir. Nov. 8, 2016). A conclusion that an expert opinion

rests on a faulty premise is essentially a finding that the opinion is unreliable under

Rule 702(a).

IV. DR. POINDEXTER’S EXPERT REPORTS AND OPINIONS

26. Dr. Poindexter submitted his initial expert report, entitled “An

Assessment of Economic Damages,” on May 21, 2014 (“May 2014 Report”). (Defs.’

Mot. Exclude Ex. B (“May 2014 Report”).) He gave deposition testimony regarding

his opinions on July 1, 2014, and prepared two supplemental reports. The first

supplemental report was prepared on June 13, 2015, (Defs.’ Mot. Exclude Ex. E

(“June 2015 Suppl.”),) and the second on January 11, 2016, (Defs.’ Mot. Exclude Ex.

F (“Jan. 2016 Suppl.”).) The supplemental reports did not change the basic

methodology used in Dr. Poindexter’s May 2014 Report. Dr. Poindexter issued the

first supplement as a correction to conform to evidence in discovery, (see June 2015

Suppl. 2,) and the second to reflect his understanding of data from one account and

to offer recalculations that became necessary due to the passage of time, (see Jan.

2016 Suppl. 2.)

27. Dr. Poindexter has substantial education, training, background, and

experience in economics, and has been qualified frequently by courts to present expert

testimony. Defendants do not premise their Motion on an attack of Dr. Poindexter’s

qualifications or credentials. Rather, their attack is on Dr. Poindexter’s methodology,

and specifically, his failure to consider and account for other market forces that may

have accounted for and caused the various financial circumstances and changes that

form the basis of his opinions. Defendants contend that, even if Dr. Poindexter’s

analysis could be deemed marginally reliable, the potential relevance of his opinions

is substantially outweighed by their prejudicial effect.

28. Safety Test asserts that Dr. Poindexter does not intend to opine as to

liability or causation. However, he clearly refers to his analysis as an assessment of

“damages.” He says that his engagement in this lawsuit is “to provide [his] expert

analysis and resulting opinion(s) with regard to damages.” (May 2014 Report 2.) He

explains that his “requested analysis stems from damaging actions described in detail

[in the] Complaint,” and that “[t]he focus of [his] analytical efforts is on business

accounts that Plaintiff contends were illegally diverted (away from Safety Test and

to ASUC) as a direct result of improper actions by named defendants in the case.”

(May 2014 Report 2.)

29. Dr. Poindexter isolated certain accounts that Hamrick and McMahan

serviced both at Safety Test and at ASUC, as well as a limited number of “unassigned”

accounts. (May 2014 Report 2.) In addition to relying on raw data furnished by ASUC

in discovery, Dr. Poindexter relied on his “informed judgment in identifying diverted

sales and attendant lost profits (and the corollary unjust enrichment of defendants).”

(May 2014 Report 2.)

30. He also assessed ASUC’s business performance before and after

Hamrick and McMahan were hired, and referred to “the dramatic changes in

ASUC[’s] business performance in concert with that company’s alleged aggressive

attack on Safety Test,” based on an “analysis [that] traces the operational

performance of ASUC over the years 2005 through 2013 to identify changes in

profitability that can be claimed to be the result of ASUC’s injurious actions.” (May

2014 Report 3.)

31. As to his assessment of sales for particular customers, or incremental

sales lost by Safety Test and gained by ASUC, Dr. Poindexter reviewed the overall

sales data for customers serviced by both Safety Test and ASUC for the period after

Hamrick and McMahan joined ASUC. Dr. Poindexter labeled those sales “diverted”

new or incremental sales, and calculated the profits that Safety Test lost from those

diverted sales. (May 2014 Report 3.) He reported his calculations on an account-by-

account basis and prepared separate tables for total diverted sales in which he

associated Safety Test’s lost profits for customers assigned to Hamrick, customers

assigned to McMahan, and customers who were “unassigned.” (May 2014 Report

Tables 1–3.) He prepared a fourth table that reflects the combined totals from the

first three tables. (May 2014 Report Table 4.) Dr. Poindexter then projected further

diverted sales and associated Safety Test’s lost profits using a three-year decay period

and discounting based on a calculated capitalization rate.

32. As to his assessment of ASUC’s overall economic condition before and

after the period in which Safety Test contends that the trade-secret misappropriation

began, Dr. Poindexter reviewed ASUC’s sales for the period between 2005 and 2013,

which included data for the years after Hamrick and McMahan joined ASUC. Dr.

Poindexter opined that ASUC had suffered significant losses in the years before it

hired Hamrick and McMahan, and that performance in those years represented a

consequential loss in ASUC’s equity value that could not be sustained and would have

led to ASUC’s failure. He opines that ASUC had “a compelling need to find a way to

stop the company’s rush toward bankruptcy.” (May 2014 Report 5.) In addition to

their motion to exclude Dr. Poindexter’s testimony in whole, Defendants have filed a

separate motion in limine to prevent that statement from being introduced at trial,

even if Dr. Poindexter is otherwise allowed to testify.

33. In addition to quantifying sales and correlated profits and opining as to

ASUC’s business risks, Dr. Poindexter states that

ASUC’s financial history conforms to what is alleged in the complaint in

this case and is supportive of allegations of illegal ASUC actions alleged

in the case. Indeed, in terms of time patterns of events, ASUC’s years

of rapid decline correlate precisely with pressures to “buy accounts” by

hiring in collaborative Safety Test personnel and by other actions to

acquire and use Safety Test proprietary information. Of course, the

timing of ASUC recovery correlates precisely with the employment of

Hamrick and McMahan and the acquisition of and reliance on other

proprietary Safety Test information.

(May 2014 Report 5.)

34. Finally, Dr. Poindexter calculates ASUC’s increased profitability in the

years after it hired Hamrick and McMahan. He refers to this increased profitability

as “profitability improvement (enrichment) enjoyed by ASUC” and “continuing unjust

enrichment.” (May 2014 Report 6.) Notably, Dr. Poindexter’s analysis is not tied only

to the sales accounts serviced by both Safety Test and ASUC, but is based on ASUC’s

overall performance in the period after it hired Hamrick and McMahan.

35. The first supplemental report followed the same methodology as the

May 2014 Report, but adjusted the data set to exclude one customer, and modified

profit calculations to account for sales commissions.

36. The second supplemental report followed the same methodology, but

changed the data set for one customer, and modified the calculations of past and

future profit figures to account for the passage of time.

37. Defendants’ Motion rests on the central premise that an expert may

opine as to damages caused by trade-secret misappropriation only if the expert fairly

accounts for other causes that contributed to losses or gains in sales and profits. They

contend that, because Dr. Poindexter made no effort to fairly account for other

contributing causes, his opinions cannot be squared with the requirements of Rule

702(a). They further contend that, in characterizing his determinations as

“damages,” Dr. Poindexter necessarily but improperly assumes a causal connection

between his calculations and the alleged misappropriation, and that doing so without

further analysis is unreliable, speculative, and not relevant. Further, Defendants

claim that, because his determinations are devoid of a foundation, any potential

relevance that his opinions might have to issues of liability is substantially

outweighed by the manifest prejudice that Defendants would suffer if Dr. Poindexter

is permitted to present his opinions to the jury at trial.

38. In opposing the Motion, Safety Test emphasizes that Dr. Poindexter has

not, and will not, express any opinion on liability or causation, but will present only

evidence that will assist the jury in making its own determination of whether

misappropriation occurred and what damages or unjust enrichment were caused by

any misappropriation that it finds. Further, Safety Test contends that, because Dr.

Poindexter expresses no opinion on either liability or causation, Safety Test is not

inviting the jury to substitute Dr. Poindexter’s opinion on liability or causation for its

own.

V. ANALYSIS

39. The parties define Dr. Poindexter’s opinions on sales and profits

attributed to specific customers served by both Safety Test and ASUC in the relevant

time period in a critically distinct way. Defendants contend that by including

“diverted” sales in his damages calculations, Dr. Poindexter necessarily expresses an

opinion on causation by assuming a proximate causal link between sales and the

alleged misappropriation. They contend that the North Carolina Court of Appeals

makes clear in Medical Staffing Network, Inc. v. Ridgway that an expert cannot

express an assumption on causation without first becoming informed of and

accounting for potential alternative causes for sales and profits unrelated to the

alleged misappropriation documented by the evidence. 194 N.C. App. at 660–61, 670

S.E.2d at 330.

40. Safety Test counters that Defendants cannot fairly apply the holding in

Medical Staffing Network, because Dr. Poindexter does not express an opinion on

Safety Test’s actual loss or Defendants’ actual gain from such sales or profits; rather,

Safety Test claims, Dr. Poindexter presents an evidentiary basis from which a jury

might reach such a conclusion based on a combination of Dr. Poindexter’s opinions

and other record evidence. In reply, Defendants argue that if this is the limited

purpose of Dr. Poindexter’s testimony, his testimony is not “expert” testimony,

because it does no more than provide facts and figures based on identified customer

files. Safety Test rejoins that expert analysis was required to isolate the diversion or

accretion in sales and to calculate and project present and future revenues and profits

associated with that diversion or accretion.

41. The Court first addresses the category of Dr. Poindexter’s opinions that

compare total revenues or specific customer sales before and after ASUC hired

Hamrick and McMahan, and then addresses Dr. Poindexter’s opinions that assess

ASUC’s overall revenues before and after Hamrick and McMahan were hired.

A. Dr. Poindexter’s Analysis of ASUC’s Customer Accounts

42. Relying on Medical Staffing Network, Defendants assert that it is

inappropriate to measure any unjust enrichment attributed to Defendants’ alleged

misappropriation by examining ASUC’s total revenues rather than examining only

those revenues that could reasonably be attributed to sales that a jury might find to

be associated with the alleged misappropriation.

43. The Court accepts Safety Test’s assurance that Dr. Poindexter will not

be asked to opine as to Defendants’ liability for trade-secret misappropriation or to

the extent of damages actually caused by any misappropriation, and the Court will

take necessary steps to hold Safety Test to that assurance. Under Medical Staffing

Network, Dr. Poindexter would be required to consider and account for alternative

causes if he intends to offer an opinion on actual damages or on the unjust enrichment

actually caused by Defendants’ alleged misappropriation. This requirement is not

tantamount to requiring Safety Test to prove that any misappropriation was the sole

cause of economic changes. Rather, an opinion on actual damages or unjust

enrichment caused by an alleged trade-secret misappropriation that does not account

for alternative causes would be speculative and thus would rest on a faulty premise.

44. The Court concludes that portions of Dr. Poindexter’s testimony may be

a proper subject of expert testimony, even though he does not intend to express an

opinion on liability or causation, and that his presentation of sales, revenues, and

related profits gained or lost for identifiable isolated customers, without further

opining as to the cause for such revenues and profits, should not, at least at this time,

be excluded under Rule 702(a). The Court preliminarily concludes that Dr.

Poindexter’s expert testimony on lost profits is necessary and appropriate to assist

the jury in understanding and assessing the parties’ changing economic

circumstances as a part of the evidence from which it will conclude whether there

was trade-secret misappropriation in the first instance, and if so, the result of that

misappropriation.

45. The Court further concludes, subject to a final determination based on

the evidence presented at trial, that Dr. Poindexter’s opinions are based on sufficient

facts or data, and result from reliable methodology and application, as long as Dr.

Poindexter does not seek to testify about the cause for the revenues and related

profits characterized as either damages or unjust enrichment. Accordingly, the Court

declines to exclude Dr. Poindexter’s opinions on reliability grounds under Rule 702(a).

46. However, the Court’s analysis does not end at the Rule 702 inquiry. The

Court must further consider whether the testimony should be excluded or limited

under Rule 403 on the grounds that the probative value of the testimony is

outweighed by its potential prejudicial effect. The Court concludes that Dr.

Poindexter’s written reports cannot be admitted in their current form, and that his

testimony cannot use certain terms embodied in those reports.

47. Dr. Poindexter’s reports include language that the Court concludes, in

its discretion, should not be permitted, because the language is unnecessary to his

opinions and presents the potential for undue prejudice adequate to exclude the

reports under Rule 403.

48. For example, Dr. Poindexter should not be allowed to characterize or

refer to the economic changes that he presents either as “damages” or as “unjust

enrichment.” The Court concludes that the use of those terms in testimony before

the jury would implicitly cause a jury to conclude that Dr. Poindexter expresses an

opinion on causation. Dr. Poindexter’s testimony, whether written or oral, should not

include those terms. Rather, Dr. Poindexter’s language should be consistent with

Safety Test’s assurance that Dr. Poindexter has been asked only to isolate changes

that he has determined as to customers before and after ASUC hired Hamrick and

McMahan. He can appropriately use the terms “profit” and “profit margin” when he

presents his opinions on profits from sales, as long as gains or losses in sales are not

referred to as “damages,” “unjust enrichment,” or similar terms that imply liability

or causation.

49. Dr. Poindexter’s reports include other phrasing that is inappropriate

and unnecessary for expert testimony that does not opine as to liability or causation.

For example, he uses the phrase “illegally diverted” when he characterizes customer

accounts. (May 2014 Report 2.) He testifies that ASUC’s finances are “supportive of

allegations of illegal ASUC actions.” (May 2014 Report 5.) The Court reserves

determination of whether to allow use of the term “diverted” sales. The Court will

not allow Dr. Poindexter to say that customer accounts or sales were diverted

“illegally.” (May 2014 Report 2.)

50. Likewise, Dr. Poindexter’s May 2014 Report crosses into an area that

suggests an opinion on causation when he refers to “[r]esulting projected sales losses

due to diversion of accounts by defendants.” (May 2014 Report 4.) The Court further

notes that Dr. Poindexter also uses the significantly more neutral phrasing “new

sales or incremental sales.” (May 2014 Report 3.) Likewise, when he refers to

statements from the complaint, Dr. Poindexter refers to ASUC’s “aggressive attack

on Safety Test.” (May 2014 Report 3.) In Dr. Poindexter’s limited role as an expert

witness assessing economic circumstances, he should not be allowed to engage in

these characterizations.

B. Dr. Poindexter’s Analysis of ASUC’s Financial Performance

51. The Court now considers Dr. Poindexter’s opinions relating to ASUC’s

overall financial performance before and after ASUC hired Hamrick and McMahan.

The Court again understands that Safety Test does not intend for Dr. Poindexter to

assign causation to ASUC’s financial performance. Rather, Safety Test intends for

Dr. Poindexter to opine on ASUC’s deteriorating financial conditions prior to its

hiring of Hamrick and McMahan, including his opinion that the deteriorating

financial conditions would have led to failure for ASUC if it had not experienced

significant changes in business performance, and that ASUC enjoyed a positive

financial change after Hamrick’s and McMahan’s hiring dates.

52. The Court preliminarily concludes that Dr. Poindexter’s analysis is a

proper subject of expert opinion and that his opinions are based on reliable

methodology and application, as long as he does not opine or imply as to the causes

of ASUC’s aggregate performance. The Court defers its final determination whether

to allow Dr. Poindexter to present these opinions until trial, after Safety Test has

presented other foundation evidence.

53. That said, the Court again concludes, in its discretion, that Dr.

Poindexter’s reports include language and statements that should be excluded under

Rule 403 because the probative value of his testimony is substantially outweighed by

the danger of undue prejudice and may mislead the jury.

54. The Court preliminarily concludes that, subject to a proper evidentiary

foundation established at trial, Dr. Poindexter may be allowed to present his

assessment of the overall declines or increases in sales revenues and equity value

during the years that he considered in his analysis. (See May 2014 Report Table 6.)

At this time, the Court rejects Defendants’ argument that the Court should exclude

Dr. Poindexter’s testimony on the basis that his opinions fail to properly consider

ASUC’s change to a subchapter-S corporation and corresponding changes in reported

losses or revenues, either internal or in tax returns. The Court further preliminarily

concludes, subject to the same issue of a proper evidentiary foundation, that Dr.

Poindexter may be allowed to express an opinion that the trend in ASUC’s decline in

equity value created the potential for an overall business failure if that trend was not

reversed.

55. However, it does not follow that Dr. Poindexter should be allowed to

express an opinion that the positive changes that ASUC enjoyed in the years

following its hiring of Hamrick and McMahan constituted “damages” to Safety Test

or “unjust enrichment” to ASUC, or that the years after 2011 should be considered a

“damages period.” Characterizing an increase in revenue, profitability, or equity

value as “unjust enrichment”—or even just as “enrichment”—implies a proximate

causal link between those figures and Defendants’ alleged misappropriation or

improper conduct. While Dr. Poindexter may ultimately be allowed to present

financial figures that the jury can use to form its conclusions, determining whether

those changes were “unjust” is a matter outside the express limitations of Dr.

Poindexter’s opinions, based on Safety Test’s assurances to the Court.

56. The Court may ultimately conclude, subject to a proper evidentiary

foundation at trial, that the presentation of “before and after” aggregate-revenue

numbers is appropriate circumstantial evidence for the jury to consider in

determining the issue of trade-secret misappropriation. See Med. Staffing Network,

194 N.C. App. at 658–59, 670 S.E.2d at 329. However, it now concludes that it would

be inappropriate for Dr. Poindexter to opine that Safety Test has suffered losses or

damages, or that ASUC has enjoyed an unjust gain, based solely on evidence of

cumulative sales, revenues, or profits that does not purport to isolate the effect of

specific customer accounts in an instance where there may be some evidentiary basis

to assume that Defendants misappropriated trade secrets. See id. at 660–61, 670

S.E.2d at 330.

57. Evidence of a defendant’s aggregate sales cannot alone serve as the basis

for an award of damages for trade-secret misappropriation. See id. The Court defers

its determination of whether it may be necessary for the Court to issue a further

limiting instruction to the jury, either at the time that Dr. Poindexter offers his

opinions or as part of the final jury instructions regarding Safety Test’s burden of

proof for damages.

VI. CONCLUSION

58. For the foregoing reasons, the Motion is GRANTED IN PART and

DENIED IN PART. The Court does not at this time exclude Dr. Poindexter as an

expert witness pursuant to Rule 702(a). However, the Court concludes, in its

discretion, that Dr. Poindexter’s testimony and his written reports that Safety Test

may seek to introduce shall be limited in accordance with this Order & Opinion, or

as otherwise necessary to avoid undue prejudice.

SO ORDERED, this the 16th day of December, 2016.

/s/ James L. Gale

James L. Gale

Chief Business Court Judge