Effective Use of Experts

From Class Issues to Damages

Joseph M. Rebein
Laurie A. Novion
Shook, Hardy & Bacon L.L.P.
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105
(816) 474-6550
[email protected]
[email protected]

Return to Course Book Table of Contents

JOSEPH M. REBEIN is a partner in Shook, Hardy & Bacon L.L.P, a litigation firm with
more than 600 attorneys and offices in nine cities. Mr. Rebein is chair of the firm’s gen-
eral litigation division, which specializes in complex litigation. In that role, he oversees
more than 200 trial lawyers assigned to the firm’s business litigation, tort, intellectual
property, environmental, and public policy sections. Mr. Rebein is also a full-time trial
lawyer with a focus on complex commercial litigation. He has served as lead counsel
in numerous class action cases, including cases alleging securities fraud and antitrust
claims.
Mr. Rebein has tried both federal and state trials, NASD arbitrations, general civil arbi-
trations, administrative proceedings before state and federal regulatory bodies, and
CFTC enforcement actions. He also has extensive experience in mediations and is the
firm’s member of the CPR Institute for Dispute Resolution.
Mr. Rebein received his bachelor of science (journalism) from the University of Kansas
in 1982. He earned his doctor of jurisprudence in 1985 from the University of Kansas
School of Law.
LAURIE A. NOVION is an associate of Shook, Hardy & Bacon L.L.P. Ms. Novion is a
member of the firm’s business litigation section, and her practice focuses on class action
litigation, antitrust litigation and other complex commercial litigation. She received
her bachelor of arts (government, with special honors) from the University of Texas in
1995. Ms. Novion earned her doctor of jurisprudence (with honors) in 1998 from the
University of Texas School of Law.
Effective Use of Experts
From Class Issues to Damages

Table of Contents
I. Introduction .......................................................................................................................................... 53
II. Deciding Whether an Expert Is Necessary to the Defense of the Case ................................................... 53
A. The Use of Consulting, Nontestifying Experts to Help with Case Strategy ..................................... 54
1. Beware of “handlers” ............................................................................................................... 54
B. The Use of Testifying Experts ......................................................................................................... 54
C. Reliance on Experts Used by Defendant Corporation or Other Defendants ................................... 55
III. Avoiding Legal Impediments Concerning the Admissibility of Expert Testimony ................................ 56
A. Avoiding Expert Challenges Based on Daubert Requirements ....................................................... 56
B. The Use of Experts on Mixed Questions of Fact and Law .............................................................. 58
IV. Effectively Using Experts on Class Certification Issues—Avoiding Battle of Experts ........................... 59
A. Class Certification Requirements ................................................................................................... 59
B. Applicability of Daubert Analysis ................................................................................................... 60
C. Courts’ Reluctance to Resolve a Battle of the Experts at the Class Certification Stage .................... 62
D. The Effective Use of Experts to Defeat Class Certification ............................................................. 62
E. Appeal of Class Certification Rulings under Federal Rule of Civil Procedure 23(f) ....................... 64
1. Standards for appeal of certification rulings ........................................................................... 64
2. Appeal of certification decisions in director and officer liability cases ................................... 64
V. The Use of Damage Experts at Trial ....................................................................................................... 65
A. General Principles .......................................................................................................................... 65
B. Attack of Plaintiffs’ Damage Methodology through Cross-Examination versus
Presentation of Expert Testimony: The “Texaco v. Pennzoil” Dilemma ........................................... 66
VI. Conclusion ............................................................................................................................................. 68

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 51

Effective Use of Experts
From Class Issues to Damages

I. Introduction
The mythical juror: “I didn’t really follow at all what Dr. Smith was saying, but he sure
looked like he knew what he was talking about.”
The above reaction is fairly commonly found among many juries who hear complex litigation disputes.
In the context of patent infringement, antitrust, securities litigation, and other business disputes come Ph.D.s,
C.P.A.s and other learned professionals who give opinions on the A to Z of litigation issues. The hope is that they
bring effective and useful information to the jury.
We have all considered the use of experts in complex litigation. Indeed, experts have become so common-
place that some lawyers would fear a claim of malpractice if they had not retained an expert. Having worked with
many experts in complex litigation, the key here is not pursuing knee-jerk expert testimony. What is most im-
portant is first identifying an area where the expert would truly aid and illuminate the point or argument. Second
to the successful use of an expert is identifying the truly effective expert. This is a person with a true expertise
in the field and an ability to communicate that information in a meaningful fashion to the judge or jury.
In commercial litigation, experts are becoming increasingly necessary due to the amount of factual in-
formation on complex business and industry practices that the jury and/or judge must understand and construe
before reaching a verdict or ruling on dispositive motions. An informed evaluation of complicated facts “is often
difficult or impossible without the application of some scientific, technical or other specialized knowledge.” Fed.
R. Evid. 702 advisory committee’s notes (1972).
The objective is to strategically use expert testimony to aid in the defense of an action while at the same
time assisting “the trier of fact to understand the evidence or to determine a fact in issue.” Fed. R. Evid. 702. For
example, experts can be used to defeat class certification in a securities class action, to show lack of causation
or fact of injury in a summary judgment motion, or to refute plaintiffs’ damage model at trial.

II. Deciding Whether an Expert Is Necessary to the Defense of the Case

Although experts are often expensive, they usually play a valuable role in the defense of complex litiga-
tion, assuming experts are used wisely and effectively. Before deciding to use an expert, an attorney should con-
sider the litigation strategy, the client’s goals and objectives, the stage of the proceedings, and then weigh the cost of
an expert with the benefits hoped to be gained through his or her testimony (or consulting role) in the litigation. If
cost is an issue, it may be worthwhile considering whether a corporate fact witness can address some of the topics
on which a potential expert witness would testify. It is also important to evaluate the effect an expert witness’s
testimony will have on the credibility of your client with the judge and jury: there is a fine line between too little
and too much expert testimony.
Last but not least, the attorney must evaluate the expert witness’s credentials, qualifications, and scope of
testimony to determine the likelihood that the expert’s testimony will survive a Daubert challenge. See Daubert
v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). If an expert witness’s testimony is questioned and ul-
timately excluded due to an inadequate foundation concerning the witness’s qualifications or the relevance and
reliability of the testimony, the client’s credibility before the court may be tarnished. Make sure to select an expert
witness who is qualified and has the necessary experience on the particular issues for which he or she is to testify.

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 53

 In the midst of all these considerations, it is essential never to forget the overall objective for using tes-
tifying expert witnesses: the admission of expert testimony that will supplement the defense’s legal strategies
and assist the trier of fact.

A. The Use of Consulting, Nontestifying Experts to Help with Case Strategy

Experts may be used for a variety of purposes, at various stages of litigation. For example, consulting
with a nontestifying expert at the beginning stages of a legal action can help develop case strategy, identify key
issues, and make initial case assessments on issues such as damages and other technical issues. If the expert
consultant has experience in the industry at issue in the case, he or she can provide suggestions on discovery to
request from other parties that will help bolster the defendants’ legal arguments and may assist in the potential
development of an alternative damage model. As the case progresses, the consultant may assist in locating experts
in particular fields to use as testifying experts, estimate damages for settlement purposes, and help in a deter-
mination of the reasonableness of settlement offers.

1. Beware of “handlers”
In certain cases, significant roles are played by nontestifying experts who work with counsel and help
identify and develop expert testimony. While these nontestifying experts are important and can greatly enhance
the case, counsel should be advised of the danger that such persons will be characterized by plaintiffs’ counsel
as “handlers” and subject to discovery.
The general proposition is that the work of nontestifying experts is not subject to disclosure where the
consulting expert is merely helping counsel understand technical issues and develop case strategy. See Fed. R.
Civ. P. 26(a)(2), (b)(4). Recently, however, two cases have suggested that in certain factual situations where a con-
sulting expert is coordinating with a testifying expert, the work of a consulting expert may be discoverable. See
Trigon Ins. Co. v. United States, 204 F.R.D. 277, 289 (E.D. Va. 2001) (“Drafts of expert opinions and communications
between experts and third parties assisting and preparing the experts would be highly useful to test both the sub-
stance of the testifying experts’ opinions and the independence of each testifying expert in arriving at his opinion.
That is especially true where the experts are in the retinue of a consultant who admittedly is involved in shaping
the experts’ testimony and perhaps even their opinions….”); see also Dura Auto. Sys. of Ind., Inc. v. CTS Corp., 285
F.3d 609, 614 (7th Cir. 2002) (“A scientist, however well credentialed he may be, is not permitted to be the mouth-
piece of a scientist in a different specialty…. A theoretical economist, however able, would not be allowed to
testify to the findings of an econometric study conducted by another economist if he lacked expertise in econo-
metrics and the study raised questions that only an econometrician could answer…. [In such a case,] the author
[of the study] would have to testify; he could not hide behind the theoretician.”). Therefore, attorneys should
proceed with caution when consulting experts are coordinating or communicating with testifying experts in the
same litigation. Based on the rulings in Trigon and Dura Automotive Systems, there is a possibility that a court
could order the production of the consulting expert’s work product.

B. The Use of Testifying Experts

Testifying experts can be effectively used to defeat class certification, as ammunition for a motion for
summary judgment, as evidence of the existence of a “genuine issue as to [a] material fact” (see Fed. R. Civ. P. 56(c))
in opposition to a summary judgment motion, and at trial on a variety of issues, including causation and dam-
ages. Expert testimony can take the form of written declarations or affidavits, deposition testimony, or live testi-
mony at an evidentiary hearing or trial.
Litigators are faced with an often difficult task of deciding whether to emphasize the flaws in the analysis

54 ❖ D&O and E&O Liability ❖ June 2003

of plaintiffs’ expert testimony through briefing and cross-examination or to affirmatively offer opposing expert
testimony. This is a particularly difficult strategic decision to make on issues concerning plaintiffs’ damage cal-
culations, and that issue will be discussed in more detail later in this article.
In many, but not all situations, some defense expert testimony may be better than no testimony at all.
Without expert evidence from a defendant, the jury may not have an alternative model or theory to weigh against
plaintiffs’ expert theory in a classic “battle of the experts.” In a decision approving a settlement of class Racketeer
Influenced and Corrupt Organizations Act (“RICO”) and Commodity Exchange Act claims against corporations
and individual defendants, the District Court for the Southern District of New York explained the possible effect
of a battle of experts, while evaluating the risks of establishing damages:
Damages at trial inevitably would involve a “battle of the experts.” As the Court observed in
In re Warner Communications,… [618 F. Supp. 735, 744-45 (S.D.N.Y. 1985), aff’d, 798 F.2d 35
(2d Cir. 1986)]: Undoubtedly, expert testimony would be needed to fix not only the amount,
but the existence, of actual damages…. In this “battle of experts,” it is virtually impossible to
predict with any certainty which testimony would be credited, and ultimately, which damages
would be found to have been caused by actionable, rather than the myriad of non-actionable
factors….
In re Sumitomo Copper Litig., 189 F.R.D. 274, 283 (S.D.N.Y. 1999); see also In re Sterling Foster & Co., Inc. Sec. Litig.,
238 F. Supp. 2d 480, 484-85 (E.D.N.Y. 2002) (“[T]he settling defendants’ experts who would have been called at
trial would vary substantially with the plaintiff’s experts and the trial would therefore be reduced to a ‘battle of
the experts’ which would possibly cause a jury to minimize or eliminate the plaintiffs’ losses.”); In re AremisSoft
Corp. Sec. Litig., 210 F.R.D. 109, 125 (D.N.J. 2002) (“[T]he Class would have to overcome damage defenses that
Defendants would assert. As is often the case, the parties would likely engage in a ‘battle of the experts,’ the out-
come of which would be unpredictable.”); In re The Prudential Ins. Co. of Am. Sales Practices Litig., 962 F. Supp.
450, 539 (D.N.J. 1997) (“[A]nother potential risk [at trial] may be plaintiffs’ necessary reliance on expert testimony
to establish liability and damages; a jury’s acceptance of expert testimony is far from certain, regardless of the
expert’s credentials. And, divergent expert testimony leads inevitably to a battle of the experts.”).
Where no expert testimony from defendants is provided, the lack of a battle of experts may make it diffi-
cult for the jury properly to assess the credibility of plaintiffs’ expert. Therefore, counsel should carefully weigh the
possible cost, simplicity, and efficiency benefits created by a decision to not present expert testimony against the
benefits created by presenting the jury with an alternative theory to evaluate.

C. Reliance on Experts Used by Defendant Corporation or Other Defendants

In most director and officer liability actions, certain directors and officers are named as defendants, along
with one or more corporations or business entities. Similarly, in complex commercial litigation not involving direc-
tors and officers, it is very common for there to be several corporate defendants. In both of those scenarios, counsel
for a particular defendant need to decide whether to rely on testifying experts presented by other codefendants,
or present testimony of their own expert.
In many cases, the defendant corporation will assume the role of the primary, lead defendant and the
directors and/or officers will take on roles of secondary defendants. Cf. In re Sprint Corp. Sec. Litig., 232 F. Supp.
2d 1193, 1199 (D. Kan. 2002) (30 named defendants were aligned into two groups for purposes of representation:
the Sprint defendants, consisting of Sprint Corp., along with its directors and officers, and the WorldCom defend-
ants, consisting of WorldCom, Inc. and Bernard J. Ebbers). It is probably fairly common practice for the various

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 55

defendants to jointly submit an expert report on certain key issues in the lawsuit, in an effort to reduce costs,
streamline the litigation, and reduce the likelihood of repetitive testimony.
Despite the common practice of relying on the testimony of the corporation’s experts or jointly submit-
ting expert reports, counsel for directors and/or officers should consider the appropriateness of this approach.
With respect to damages, there may be reasons for a director or officer to submit a damage model that differs
from the other defendants’ damage model where the corporation’s economic footing is unclear, where corporate
bankruptcy issues may arise or where the plaintiffs have not brought identical claims against the individual and
corporation defendants. See, e.g., In re Reliance Sec. Litig., 135 F. Supp. 2d 480, 510 (D. Del. 2001) (plaintiffs’ claim of
damages was challenged by only a few of the defendants); E.J. McKernan Co. v. Gregory, 623 N.E.2d 981, 998-99
(Ill. App. Ct. 1993) (in action asserting breach of fiduciary duty and tortious interference claims, court held that
jury’s return of separate verdicts against the individuals and corporate entities was not erroneous); see also In re
Sprint Corp. Sec. Litig., 232 F. Supp. 2d at 1200 (“The rule followed by the Tenth Circuit is that the stay provision
does not extend to the third party defendants or a debtor’s codefendants. However, under §105(a) of the Bank-
ruptcy Code, courts may extend the protection of the automatic stay to a debtor corporation’s officers, directors,
and employees during the pendency of a Chapter 11 case.”) [internal citation omitted]. In addition, depending
on the unique claims asserted against the director and/or officer and the factual allegations in the complaint, it
may be desirable for a director or officer to present expert testimony on causation or affirmative defense issues
that is not applicable to the corporation’s defense of the case. See, e.g., In re Enron Corp. Sec., Derivative & ERISA
Litig., F. Supp. 2d , 2003 WL 1089307 (S.D. Tex. Mar. 12, 2003) (separate motions to dismiss and mo-
tions to strike complaint were filed by several groups of defendants, including a group of outside directors); In
re Reliance Sec. Litig., 135 F. Supp. 2d 480 (D. Del. 2001) (various individual and corporate defendants moved for
summary judgment under several different theories, and each defendant’s arguments in support of summary
judgment were not identical).

III. Avoiding Legal Impediments Concerning the Admissibility

of Expert Testimony
A. Avoiding Expert Challenges Based on Daubert Requirements
Under Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), federal trial judges must act as
gate keepers to exclude unreliable scientific expert testimony. Under Daubert, the court makes a preliminary as-
sessment of whether the expert’s reasoning or methodology is scientifically valid and then looks to whether the
testimony “will assist the trier of fact in understanding the evidence or in determining a fact in issue.” Daubert,
509 U.S. at 591-93. In Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), the Supreme Court confirmed that the
trial judge’s gate-keeper role applies to the admission of scientific as well as nonscientific testimony related to
“‘technical’ and ‘other specialized’ knowledge.” Kumho Tire, 526 U.S. at 141, 147-49. In analyzing the admissibility
of expert testimony, there is “no relevant distinction between ‘scientific’ knowledge and ‘technical’ or ‘other spe-
cialized’ knowledge.” Id. at 147.
Federal Rule of Evidence 702 was amended in 2002 to be consistent with the trial court’s gate-keeper
role as set forth by Daubert. Rule 702 provides:
If scientific, technical, or other specialized knowledge will assist the trier of fact to understand
the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge,
skill, experience, training, or education, may testify thereto in the form of an opinion or other-
wise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the

56 ❖ D&O and E&O Liability ❖ June 2003

 product of reliable principles and methods, and (3) the witness has applied the principles
and methods reliably to the facts of the case.
Fed. R. Evid. 702. Pursuant to Rule 702, three criteria are used by federal courts to determine the admissibility
of expert testimony: (1) the witness’s qualification as an expert; (2) the relevance of the testimony; and (3) the
reliability of the testimony. The party offering the expert witness testimony has the burden of proving by a pre-
ponderance of the evidence that the requirements of Rule 702 have been satisfied. See Fed. R. Evid. 702 advisory
committee’s note (2000); Fed. R. Evid. 104(a); Bourjaily v. United States, 483 U.S. 171, 172 (1987). The Daubert
analysis is also applied by the majority of state courts; other states use their own unique standards or apply the
old federal court test under Frye v. United States, 293 F. 1013 (D.C. Cir. 1923). Under that test, scientific expert
testimony must be based on “generally accepted” scientific principles.
The court’s initial inquiry is whether the witness qualifies as an expert in the subject area in which he or
she proposes to testify. An expert cannot testify on a subject matter in which he or she has no expertise. Before
choosing an expert, an attorney should carefully scrutinize the expert’s credentials, experience in the field or
area in which he would testify, and past expert testimony in other litigation.
Assuming the district court finds the witness has the necessary qualifications, the court then analyzes the
relevance of the testimony. Under Fed. R. Evid. 401, “relevant evidence” is “evidence having any tendency to make
the existence of any fact that is of consequence to the determination of the action more probable or less probable
than it would be without the evidence.” Fed. R. Evid. 401. In the context of expert testimony, “[t]his requirement
has been interpreted to mean that scientific testimony must ‘fit’ the facts of the case, that is, there must be a con-
nection between the scientific research or test result being offered and the disputed factual issues in the case in
which the expert will testify.” Pride v. BIC Corp., 218 F.3d 566, 577 (6th Cir. 2000) [citations omitted].
Finally, the court must conclude that the testimony is reliable before it will be admitted. Scientific knowl-
edge “connotes more than subjective belief or unsupported speculation.” Daubert, 509 U.S. at 590. Daubert pro-
vides a nonexclusive, flexible list of factors to consider when determining the reliability of expert testimony: (1)
whether the technique or theory can be or has been tested empirically; (2) whether the theory has been subjected
to peer review and publication; (3) whether there is a known rate of error for the underlying technique or method-
ology; and (4) whether the methodology is generally accepted in the relevant scientific community. Id. at 593-94.
“[N]o single factor is necessarily dispositive of the reliability of a particular expert’s testimony.” Fed. R. Evid. 702
advisory committee’s note (2000). With respect to nonscientific testimony, the application of these four Daubert
factors will vary based on the “nature of the issue, the expert’s particular expertise, and the subject of his testi-
mony.” Kumho Tire, 526 U.S. at 150 [citation omitted]. “Daubert’s list of specific factors neither necessarily nor
exclusively applies to all experts or in every case.” Id. at 141, 152 (“[W]e conclude that the trial judge must have
considerable leeway in deciding in a particular case how to go about determining whether particular expert tes-
timony is reliable.”).
An opposing party’s Daubert motion should base its challenges “solely on principles and methodology”
used by the expert and not on the expert’s conclusions. Daubert, 509 U.S. at 595. In addition, the amendment to
Rule 702 is “broad enough to permit testimony that is the product of competing principles or methods in the same
field of expertise.” Fed. R. Evid. 702 advisory committee’s note (2000). When a trial court rules that an expert’s
testimony is reliable, “this does not necessarily mean that contradictory expert testimony is unreliable.” Id.
When choosing experts for a case, counsel should always consider the federal court’s Daubert test and the
requirements of Rule 702. In order to avoid an opposing party’s successful Daubert challenges to experts the de-
fendant intends to use, the defendant should make a preliminary assessment of whether the expert testimony
meets the admissibility requirements. The opposing side will always be looking for ways to discredit and possibly

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 57

exclude the other party’s experts, and there is no reason to provide fuel to their cause. Although “[a] review of the
caselaw after Daubert shows that the rejection of expert testimony is the exception rather than the rule,” an attor-
ney must be confident that its client’s experts will satisfy the Daubert analysis to avoid, as much as possible, last
minute exclusion of expert testimony by the trial court. See Fed. R. Evid. 702 advisory committee’s note (2000).

B. The Use of Experts on Mixed Questions of Fact and Law

Apart from the federal courts’ analysis of the admissibility of expert testimony under the Daubert test,
some courts have been reluctant to admit expert testimony on mixed questions of fact and law. Focusing on the
legal aspects of the expert’s testimony, courts have held that the evidence is not relevant to any of the factual issues
in dispute and addresses a legal issue reserved for the court. See, e.g., In re Initial Public Offering Sec. Litig., 174 F.
Supp. 2d 61, 64 (S.D.N.Y. 2001) (holding that “[t]he law of this circuit is that while an expert may provide an opin-
ion to help a jury or a judge understand a particular fact, ‘he may not give testimony stating ultimate legal conclu-
sions based on those facts.’… In fact, every circuit has explicitly held that experts may not invade the court’s
province by testifying on issues of law.”); In re Cardizem CD Antitrust Litig., 105 F. Supp. 2d 682, 700 n.10 (E.D.
Mich. 2000) (refusing to consider testimony of defendant’s expert who provided testimony that it was more likely
than not that one defendant would have prevailed on its patent infringement claims, that the court would have
adopted the claim construction urged by the defendant, and the defendant would have been entitled to a prelimi-
nary injunction in earlier litigation on grounds that the testimony “inappropriately renders an opinion on ques-
tions of law that rest solely within the province of the Court, i.e., claim construction and the grant or denial of
injunctive relief ”).
Some of those court decisions, however, fail to distinguish between expert testimony solely on questions
of law and testimony addressing mixed questions of fact and law. Other cases acknowledge that testimony on
mixed questions of law and fact may be admissible, “but the testimony must remain focused on helping the jury
or judge understand particular facts in issue and not opine on the ultimate legal conclusion.” See In re Initial
Public Offering Sec. Litig., 174 F. Supp. 2d at 65-66 (excluding testimony from judicial ethics expert on issues
concerning whether the court must recuse itself under 28 U.S.C. §455 because there were no facts in dispute).
Furthermore, testimony concerning mixed questions of law and fact has been allowed by certain federal
courts. For example, in ruling on a motion in limine to exclude evidence from trial, the court in In re Blech Secu-
rities Litigation, No 94. Civ. 7696 (RWS), 2003 WL 1610775 (S.D.N.Y. Mar. 26, 2003), held that defendants’ expert
“can testify as to what ordinary broker activity entails and as to the customs and practices of the industry,… but
he cannot conclude that [defendant’s] trades were proper.” Id. at *21. The court limited the overall scope of the
defense expert’s testimony, however, because the expert’s “conclusion that [defendant] did not engage in parking or
other stock manipulation improperly impinges upon the roles of the court and jury.” Id. A similar analysis was
applied to the testimony of plaintiffs’ experts. In securities actions, the court commented, “the use of expert testi-
mony must be ‘carefully circumscribed,’ and experts are not to improperly use specific statutory and regulatory
language, such as ‘manipulation’ and ‘scheme to defraud’ to describe the defendants’ actions.” Id. at *22 [internal
citations omitted].
Another court decision ruled that testimony on mixed questions of fact and law was permissible in the
context of a class certification motion. See Midwestern Mach. v. Northeast Airlines, Inc., 211 F.R.D. 562 (D. Minn.
2001) (asserting claim under section 7 of the Clayton Act, 15 U.S.C. §18, and alleging that defendant’s merger with
another airline resulted in a lessening of competition). In that case, the court found that expert reports were ad-
missible for the purpose of determining whether the class should be certified. Plaintiffs sought to strike the expert
report of Professor May Kay Kane, dean and professor at Hastings College of Law in San Francisco. Id. at 568. Her
affidavit provided opinions on the manageability of the class action and the plaintiffs’ satisfaction of the superi-

58 ❖ D&O and E&O Liability ❖ June 2003

ority requirement, “caution[ing] the Court that the volume and complexity of the evidence will defeat manage-
ability and will create a strong likelihood of confusing the jury.” Id. Plaintiffs argued that the Kane affidavit con-
sisted of inadmissible testimony on a legal issue. The court responded by stating:
[t]aken to the extreme, Plaintiffs’ theory would argue against testimony by any attorney or
legal scholar on legal issues. Moreover, it is not clear that Kane’s affidavit is pure legal opinion.
More accurately, Kane is discussing the facts of the current case and applying the law. If the
affidavit required characterization, it would be better called an opinion of mixed law and fact.
Id. The court ultimately found that Dean Kane’s affidavit was appropriately filed as an expert opinion and denied
plaintiffs’ motion to strike the affidavit. Id.
Due to conflicting case law, it is unclear to what extent expert testimony on mixed questions of law and
fact is admissible. Such testimony is worth pursuing, however, because if admitted, it can help simplify the analysis
of factual issues in dispute. For example, an expert can evaluate the extent to which factual issues will need to be
resolved in a class action on a class-member-by-class-member basis and offer an opinion as to the predomi-
nance of individual issues or the manageability of the action.

IV. Effectively Using Experts on Class Certification Issues—Avoiding

Battle of Experts
In an appropriate case, expert testimony can help defeat a motion for class certification by establishing
flaws in the class definition or class period, demonstrating the lack of common issues on questions concerning fact
of injury and causation, and showing how the proposed class action will be unmanageable. Counsel should refrain
from using expert testimony, however, if it will not assist their arguments in opposition to class certification. One
case decision has actually commented that although some of the affidavits and deposition testimony submitted
by the parties “w[ere] helpful to the Court in consideration of the class certification motion, [ ] most of it was not.”
Dry Cleaning & Laundry Inst. of Detroit, Inc. v. Flom’s Corp., 1993-2 Trade Cas. (CCH) ¶ 70,408, 1993 WL 527928
(E.D. Mich. Oct. 19, 2003). Recent decisions suggest that the likelihood that expert testimony offered by defendants
will be relied upon by a district court in denying a motion for class certification is becoming less likely, since more
and more courts are unwilling to engage in a battle of conflicting expert testimony at the class certification stage. A
defendant should not give up the battle, though, since some courts have been willing to scrutinize the method-
ology and reliability of expert testimony that concludes that liability and damage issues can be shown on a
classwide basis.

A. Class Certification Requirements

A class action “may only be certified if the… court is satisfied, after a rigorous analysis,” that the pro-
cedural prerequisites for class certification have been met. General Tel. Co. of Southwest v. Falcon, 457 U.S. 147,
161 (1982). To proceed as a class, plaintiffs must satisfy all four elements of Rule 23(a) (numerosity, commonal-
ity, typicality, and adequacy) and at least one of the Rule 23(b) provisions. Amchem Prods., Inc. v. Windsor, 521
U.S. 591, 614 (1997).
Rule 23(a) requires that plaintiffs establish that:
(1) the class is so numerous that joinder of all members is impracticable [“numerosity”],
(2) there are questions of law or fact common to the class [“commonality”], (3) the claims
or defenses of the representative parties are typical of the claims or defenses of the class
[“typicality”], and (4) the representative parties will fairly and adequately protect the inter-
ests of the class [“adequacy”].

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 59

Fed. R. Civ. P. 23(a). Since class actions involving director and officer liability, such as securities actions and breach
of fiduciary duty cases, usually seek the recovery of money damages from defendants, plaintiffs will need to
satisfy the requirements of Rule 23(b)(3). Pursuant to Rule 23(b)(3), the class will not be certified unless
the court finds that the questions of law or fact common to the members of the class predomi-
nate over any questions affecting only individual members [“predominance”], and that a class
action is superior to other available methods for the fair and efficient adjudication of the
controversy [“superiority”].
Fed. R. Civ. P. 23(b)(3).
A rigorous analysis requires the trial court to go beyond the bare allegations of the pleadings “as a court
must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful
determination of certification issues.” Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996). Although
courts should not determine the merits in deciding the class question, even at the class stage, the nature of the
claims and the proof required to adjudicate them necessarily must be addressed. See Coopers & Lybrand v. Livesay,
437 U.S. 463, 469 n.12 (1978) (“Evaluation of many of the questions entering into determination of class action
questions is intimately involved in the merits of the claims.”). As explained by the Seventh Circuit in a recent
decision written by Judge Easterbrook:
Before deciding whether to allow a case to proceed as a class action, therefore, a judge should
make whatever factual and legal inquiries are necessary under Rule 23…. And if some of
the considerations under Rule 23(b)(3), such as “the difficulties likely to be encountered in
the management of a class action”, overlap the merits—as they do in this case…—then the
judge must make a preliminary inquiry into the merits.
Szabo v. Bridgeport Machs., Inc., 249 F.3d 672, 676 (7th Cir.), cert. denied, 534 U.S. 951 (2001).

B. Applicability of Daubert Analysis

Decisions in the antitrust area have repeatedly analyzed to what extent the Daubert requirements should
apply in the class certification context. Several courts have been willing to scrutinize to some degree the meth-
odologies used by experts, but most are unwilling to engage in a full Daubert-based inquiry.
For example, in In re Visa Check/MasterMoney Antitrust Litigation, 192 F.R.D. 68 (E.D.N.Y. 2000), aff ’d,
280 F.3d 124 (2d Cir. 2001), cert. denied, 536 U.S. 917 (2002), both sides introduced expert reports, and defendants
filed a motion to strike the testimony of plaintiffs’ expert. 192 F.R.D. at 74-76. Defendants argued that the testi-
mony of plaintiffs’ expert was inadmissible under Fed. R. Evid. 702 and Daubert because it is “legally irrelevant and
not rationally based on the pertinent facts or on any analysis.” Id. at 76. Although the court stated that at this stage
in the litigation, the court is “far from the ‘trier of fact’ contemplated in Rule 702" and is “expressly forbidden from
engaging in a ‘preliminary inquiry into the merits’ of the case,” the court acknowledged that there is a limited role
for a Daubert inquiry at the class certification stage. Id. at 76-77. A court should not “certify a class… on the basis
of an expert opinion so flawed that it is inadmissible as a matter of law.” Id. at 76. Ultimately, the court concluded
that the expert testimony was admissible for the narrow purpose of supporting the class certification motion:
the expert’s qualifications are “impeccable,” defendants have not shown that the expert “failed to ‘rely upon the
type of methodology and data typically used and accepted’ in cases such as this one,” and defendants’ disagree-
ment with the expert’s conclusions “is not a basis for exclusion.” Id. at 78. See also Thomas & Thomas Rodmakers,
Inc. v. Newport Adhesives & Composites, Inc., 209 F.R.D. 159, 162 (C.D. Cal. 2002) (“It is clear to the Court that a
lower Daubert standard should be employed at this stage in the proceedings” (citing In re Visa Check/MasterMoney

60 ❖ D&O and E&O Liability ❖ June 2003

Antitrust Litig., 280 F.3d 124, 132 n.4 (2d Cir. 2001), cert. denied, 536 U.S. 917 (2002), and In re Linerboard Anti-
trust Litig., 203 F.R.D. 197, 217 n.13 (E.D. Pa. 2001), aff ’d, 305 F.3d 145 (3d Cir. 2002)).
In a recent antitrust action, Nichols v. Smithkline Beecham Corp., 2003-1 Trade Cas. (CCH) ¶ 73,974, 2003
WL 302352 (E.D. Pa. Jan. 29, 2003), defendants sought to exclude testimony on class certification issues from
plaintiffs’ proffered expert, arguing that the testimony did not satisfy Fed. R. Evid. 702. Id. at *3. The court denied
defendants’ motion and held that plaintiffs’ expert need not meet the Daubert requirements to be admissible with
respect to the class certification motion. “At this stage of the proceeding, the Court does not consider whether an
expert witness’s opinion would be admissible pursuant to Daubert, ‘the Court simply examines whether [the ex-
pert’s] methodology, as proposed, will comport with the basic principles of econometric theory, will have any
probative value, and will primarily use evidence that is common to all members of the proposed class.’” Id. at *4
[citation omitted]. The court then examined the expert’s testimony and found that plaintiffs’ expert “has identi-
fied a generally accepted methodology for determining impact which is applicable to the class,”“this methodology
uses evidence common to all class members,” and the expert opinion “has probative value.” Id. at *4-8.
Several other recent cases have refused to conduct a full-blown Daubert inquiry at the class certification
stage. For instance, in In re Mercedes-Benz Antitrust Litigation,—F.R.D.—, 2003 WL 556359 (D.N.J. Feb. 19, 2003),
defendants filed a motion to strike the testimony of plaintiffs’ expert who testified on classwide antitrust impact.
Id. at *10. Consistent with previous federal court decisions, the court held that it “is not to conduct a preliminary
inquiry into the merits of plaintiffs’ case” when determining the appropriateness of class certification. Id. Although
defendants objected to various aspects of the expert’s methodology, the court ruled that at this stage, plaintiffs
need present only “sufficient evidence and a plausible theory to convince the Court that class-wide impact… may
be proven by evidence common to all class members.” Id. The district court then determined that plaintiffs met
their burden of “establish[ing] a method by which [their] or another expert might be able to derive an analytical
model to determine the existence of class-wide impact.” Id. at *11. Cf. Bacon v. Honda of Am. Mfg., Inc., 205 F.R.D.
466, 470-71 (S.D. Ohio 2001) (concluding that a Daubert inquiry is not warranted at this stage of the proceedings,
but nevertheless examined the expert “testimony to determine whether it in fact supports the certification of
the class in this case”).
Similarly, in In re South Dakota Microsoft Antitrust Litigation, 657 N.W.2d 668 (S.D. 2003), another anti-
trust class action, the South Dakota Supreme Court held that plaintiffs had made a sufficient threshold showing of
classwide injury through expert testimony. Microsoft challenged the proposed methodology of plaintiffs’ expert
testimony on classwide impact and damages and submitted conflicting expert testimony. Id. at 674, 677. The court
described its analysis of the admissibility of expert evidence on class certification issues as a “lower Daubert
standard:”
[T]his judicial inquiry does not involve a determination as to the likely success of the Class
Members’ proposed methods. However, the Class Members must present at least one viable
method for computing damage on a class-wide basis, one which a reasonable factfinder
could accept.
Id. at 677. Although the court conceded that “[p]roduction of a self-professed expert is simply not enough to meet
the certification requirements under our rigorous analysis standard,” it held that the district court did not abuse its
discretion by not accepting Microsoft’s damage theories at this stage in the proceeding. Id. at 679. The court dis-
tinguished an earlier opinion of another court that had conducted a “very extensive examination” of the same
plaintiffs’ expert and concluded that the expert’s theories were “insufficient to support class certification, as they
were ‘slogans, not methods of proof.’” Id. at 678; see A&M Supply Co. v. Microsoft Corp., 654 N.W.2d 572, 638-39
(Mich. Ct. App. 2002). Of particular interest, Justice John K. Konekamp, in a concurring opinion, questioned

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 61

whether plaintiffs’ expert theories on damages will survive a later Daubert hearing. In re South Dakota Microsoft
Antitrust Litig., 657 N.W.2d. at 680.

C. Courts’ Reluctance to Resolve a Battle of the Experts at the Class Certification Stage
Related to the district court’s inquiry into the admissibility and relevance of expert testimony offered in
the context of a motion for class certification, case decisions from a variety of jurisdictions have held that the court
must not delve into the merits of the action and resolve a battle of the experts at that early stage in the litigation.
In a commonly cited case, In re Potash Antitrust Litigation, 159 F.R.D. 682 (D. Minn. 1995), the District
Court for the District of Minnesota granted plaintiffs’ motion for class certification in an action alleging that de-
fendants conspired to fix the wholesale price of potash, a material used for fertilizer production, in violation of
section 1 of the Sherman Act, 15 U.S.C. §1. Id. at 687. In support of their class certification motion, plaintiffs
presented an expert who testified that the conspiracy had a common impact on all class members. Defendants
then offered testimony from their own expert who concluded that impact, or fact of injury, could not be shown
on a classwide basis. Id. at 696-97. In analyzing the conflicting expert testimony, the court stated that “[t]his
case presents the familiar ‘battle of the experts.’” Id. at 697. Accepting plaintiffs’ expert analysis for purposes of
the class certification motion, the court held:
The certification stage of this litigation is not, however, the proper forum in which to resolve
this battle…. “[W]hether or not plaintiffs’ expert is correct in his assessment of common
impact/injury is for the trier of fact to decide, at the proper time.” Without trenching on the
merits, a court must consider only whether plaintiffs have made a threshold showing “that
what proof they will offer will be sufficiently generalized in nature that… the class action
will provide a tremendous savings of time and effort.”
Id. [internal citations omitted]. Many other courts have adopted this approach to dealing with a “battle of the ex-
perts” during the class certification stage of litigation. See, e.g., Caridad v. Metro-North Commuter R.R., 191 F.3d
283, 292 (2d Cir. 1999); DeLoach v. Philip Morris Cos., Inc., 206 F.R.D. 551, 563-64 (M.D.N.C. 2002); Arden Archi-
tectural Specialties, Inc. v. Washington Mills Electro Minerals Corp., 2002-2 Trade Cas. (CCH) ¶ 73,818, 2002 WL
31421915, at *10 (W.D.N.Y. Sept. 17, 2002); In re Bromine Antitrust Litig., 203 F.R.D. 403, 408, 414 (S.D. Ind. 2001);
In re Cardizem CD Antitrust Litig., 200 F.R.D. 297, 311 (E.D. Mich. 2001); Drayton v. Western Auto Supply Co., 203
F.R.D. 520, 527 n.3 (M.D. Fla. 2000), aff ’d in part and rev’d in part, 34 Fed. Appx. 387, 2002 WL 518017 (11th Cir.
Mar. 11, 2002); O’Connor v. Boeing N. Am., Inc., 184 F.R.D. 311, 324 n.16 (C.D. Cal. 1998); In re Commercial Tissue
Prods., 183 F.R.D. 589, 596 (N.D. Fla. 1998); In re South Dakota Microsoft Antitrust Litig., 657 N.W.2d 668, 677
(S.D. 2003). In contrast, however, the Seventh Circuit has been willing to consider issues on the merits and con-
flicting expert testimony in the class certification context. See West v. Prudential Secs. Inc., 282 F.3d 935 (7th Cir.
2002), and Szabo v. Bridgeport Machs., Inc., 249 F.3d 672 (7th Cir. 2001), cert. denied, 534 U.S. 951 (2001) (both
discussed in more detail in infra section IV.E).

D. The Effective Use of Experts to Defeat Class Certification

Federal courts have denied motions for class certification in securities fraud actions when the court has
concluded that the fraud on the market theory, and the corresponding presumption of reliance, do not apply to
plaintiffs’ claims. In some of those cases, expert testimony was effectively used to demonstrate the inapplicability
of the fraud on the market theory and emphasize the lack of predominance of common issues. For an in-depth
analysis of damage related expert testimony to consider at the class certification stage, see Seth Aronson & Ben-
jamin Rozwood, Effective Use of Damages Experts in Securities Class Actions, 132 PLI/Corp. 805 (2002).

62 ❖ D&O and E&O Liability ❖ June 2003

 In O’Neil v. Appel, 165 F.R.D. 479 (W.D. Mich. 1996), plaintiffs sought certification of a class in a securities
action against individual directors and officers. The parties presented economics experts addressing the fraud on
the market theory. Id. at 495. Despite plaintiffs’ contrary assertions, the court held that an examination of the mer-
its of the fraud on the market theory was appropriate in connection with an evaluation of a class certification
motion. Id. at 497-98. The court stated that it should “make a preliminary determination concerning the likely
strength of the theory, so that an intelligent decision can be made concerning the probable issues for resolution
at trial.” Id. at 500. Based on a review of the record and the parties’ expert testimony, the court concluded that
“plaintiffs have virtually no chance of succeeding on this theory.” Id. at 500-06. The magistrate judge filed a re-
port recommending denial of plaintiffs’ motion for class certification, which was accepted and adopted by the
district court judge. Id. at 482-83.
A federal district court in another case denied plaintiffs’ motion for class certification after finding that
the presumption of reliance provided by the fraud on the market theory did not apply to plaintiffs’ claims. Krog-
man v. Sterritt, 202 F.R.D. 467 (N.D. Tex. 2001). In Krogman, investors brought securities fraud claims against a
corporation’s former executives, alleging that defendants “defrauded Plaintiffs by misstating and omitting material
facts regarding [the corporation] in numerous SEC filings and other disclosures to the market.” Id. at 470. Because
proof of individual reliance would be needed, the court held that plaintiffs did not satisfy the predominance re-
quirement under Rule 23(b)(3). Id. at 478. The court undertook an exhaustive review of the record and the parties’
expert testimony to determine if plaintiffs had demonstrated that the market was efficient, ultimately concluding
that the fraud on the market theory should not apply. See id. at 474-78. See also West v. Prudential Sec., Inc., 282
F.3d 935 (7th Cir. 2002) (discussed in infra section IV.E.2); In re Livent, Inc. Noteholders Sec. Litig., 211 F.R.D. 219,
222-24 (S.D.N.Y. 2002) (after reviewing the record and the expert reports submitted by the parties, court con-
cluded that the fraud on the market theory did not apply because plaintiffs had not made an adequate showing of
market efficiency); Serfaty v. International Automated Sys., Inc., 180 F.R.D. 418, 423 (D. Utah 1998) (after weighing
the expert testimony submitted by the parties in connection with a class certification motion, court concluded
that the corporation’s stock “was not traded in an efficient market, and Plaintiffs are not entitled to the pre-
sumption of reliance available under the fraud on the market theory”).
In contrast, defendants were unable to successfully use expert testimony to defeat class certification in
Castillo v. Envoy Corp., 206 F.R.D. 464 (M.D. Tenn. 2002), a securities fraud action alleging that officers of the
corporation “improperly recorded large, one-time write-offs” for research and development concerning three
acquisitions by the corporation, which artificially inflated the corporation’s stock price. See id. at 467. Defendants
argued that the predominance requirement under Rule 23(b)(3) was not satisfied because the presumption of
reliance should not apply, and plaintiffs would therefore need to individually prove each class member’s reliance.
Id. at 469. Defendants asserted they had rebutted the presumption of reliance by their expert witness’s testimony
that the “alleged misrepresentations had no measurable effect on [the corporation’s] stock price.” Id. The court
granted the class certification motion, finding that common issues of reliance will predominate under a fraud on
the market theory, id. at 473; in reaching that decision, the court held that defendants’ argument that they had
rebutted the presumption of reliance improperly reached into the merits of the case at the class certification stage.
Id. at 471-73. See also Cheney v. Cyberguard Corp., F.R.D. , 2003 WL 1089296, at *15 (S.D. Fla. Mar. 7, 2003)
(“Mindful that the Court may not rule on the merits of Plaintiffs’ ‘Fraud on the Market’ theory on class certifica-
tion, the Court finds that the evidence provided by Plaintiffs’ expert is adequate for certification on the basis of
an efficient market although much of the evidence is disputed by Defendants’ expert.”).

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 63

 E. Appeal of Class Certification Rulings under Federal Rule of Civil Procedure 23(f)

1. Standards for appeal of certification rulings

Before 1998, the only way to appeal a class certification decision was by interlocutory appeal through 18
U.S.C. §1292(b) or by mandamus review pursuant to 18 U.S.C. §1651. Effective December 1, 1998, Federal Rule of
Civil Procedure 23 was amended “to expand the ways for taking an interlocutory appeal.” Panache Broad. of Penn.,
Inc. v. Richardson Elecs., Ltd., No. 90-C-6400, 1999 WL 1024560 (N.D. Ill. Oct. 29, 1999); see Fed. R. Civ. P. 23(f).
Rule 23(f) provides a means to automatically petition the circuit court of appeals for permission to ap-
peal from an order granting or denying certification of a class. Under Rule 23(f), a federal court of appeals may in
its discretion permit an appeal from an order of a district court granting or denying class action certification
under this rule if application is made to it within ten days after entry of the order. Unlike 28 U.S.C. §1292(b), Rule
23(f) does not require that the district court certify that the ruling “involves a controlling question of law as to
which there is a substantial ground for difference of opinion and that an immediate appeal from the order may
materially advance the ultimate termination of the litigation.” See 28 U.S.C. §1292(b); Fed. R. Civ. P. 23(f) advi-
sory committee’s notes (1998).
The court of appeals has unfettered discretion to grant an appeal under Rule 23(f) and “[p]ermission to
appeal may be granted or denied on the basis of any consideration that the court of appeals finds persuasive.”
Fed. R. Civ. P. 23(f) advisory committee’s note (1998). Although the language of Rule 23(f) does not provide
standards for granting review of a class certification decision, the Advisory Committee’s Note emphasizes that
“[p]ermission is most likely to be granted when the certification decision turns on a novel or unsettled question of
law, or when, as a practical matter, the decision on class certification is likely dispositive of the litigation.” Fed. R.
Civ. P. 23(f) advisory committee’s note (1998). In the past few years, several circuits have adopted standards to
use when determining whether to accept a petition for appeal under Rule 23(f). See, e.g., In re Lorazepam &
Clorazepate Antitrust Litig., 289 F.3d 98 (D.C. Cir. 2002); Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259
F.3d 154 (3d Cir. 2001); Lienhart v. Dryvit Sys., Inc., 255 F.3d 138 (4th Cir. 2001); Prado-Steiman ex rel. Prado v.
Bush, 221 F.3d 1266 (11th Cir. 2000); Waste Mgmt. Holdings, Inc. v. Mowbray, 208 F.3d 288 (1st Cir. 2000); Blair v.
Equifax Check Servs., Inc., 181 F.3d 832 (7th Cir. 1999).

2. Appeal of certification decisions in director and officer liability cases

If a district court fails to consider expert testimony offered by defendants on complex issues concerning
fact of injury (and perhaps calculation of damages), for fear of addressing the merits, West v. Prudential Securities,
Inc., 282 F.3d 935 (7th Cir. 2002), and Szabo v. Bridgeport Machines, Inc., 249 F.3d 672 (7th Cir. 2001), cert. denied,
534 U.S. 951 (2001), suggest there might be an appealable issue. In that situation, a party should consider whether
the filing of a petition for permission to appeal the class certification decision under Rule 23(f) is a strategic move
worth making. Although many courts have refused to assess the credibility or weight to be given to the method-
ologies and analysis of plaintiffs’ experts where a defendant has offered conflicting expert testimony, the Seventh
Circuit has held:
[Where] some of the considerations under Rule 23(b)(3), such as “the difficulties likely to be
encountered in the management of a class action,” overlap the merits—as they do in this
case, where it is not possible to evaluate impending difficulties without making a choice of
law…—then the judge must make a preliminary inquiry into the merits.
Szabo, 249 F.3d at 676 (vacating district court’s order certifying a class after finding that the district court improp-
erly deferred addressing important issues bearing on class certification on grounds that doing so would require

64 ❖ D&O and E&O Liability ❖ June 2003

a merits-based inquiry; concluding that issues concerning merits-based inquiries have “evaded attention of
appellate courts”).
The Seventh Circuit recently granted a defendant’s petition for appeal under Rule 23(f) in a securities
class action. See West v. Prudential Sec., Inc., 282 F.3d 935 (7th Cir. 2002). Plaintiff-investors alleged that a stock-
broker employed by Prudential falsely told clients that a certain corporation, whose stock he traded, “was certain
to be acquired, at a big premium, in the near future,” artificially inflating the stock’s price. Id. at 936. After applying
the fraud on the market theory, the district court certified a class of all persons who bought the corporation’s
stock during the period the alleged misrepresentations were made. Id. at 937. The district court applied the fraud
on the market theory to a situation where the oral representations were not released to the public; the Seventh
Circuit Court of Appeals held that the district court’s expansion of the fraud on the market theory raised a novel
question of law. Id. The Seventh Circuit commented that “very few securities class actions are litigated to conclu-
sion, so review of this novel and important legal issue may be possible only through the Rule 23(f) device.” Id.
On appeal, the Seventh Circuit held that the district court erred by applying the fraud on the market
theory and its corresponding presumption of reliance:
The district court did not identify any causal link between non-public information and securi-
ties prices…. Instead the judge observed that each side has the support of a reputable finan-
cial economist (Michael J. Barclay for the plaintiffs, Charles C. Cox for the defendant) and
thought the clash enough by itself to support class certification and a trial on the merits. That
amounts to a delegation of judicial power to the plaintiffs, who can obtain class certification
just by hiring a competent expert. A district judge may not duck hard questions by observing
that each side has some support, or that considerations relevant to class certification also may
affect the decision on the merits. Tough questions must be faced and squarely decided, if
necessary by holding evidentiary hearings and choosing between competing perspectives.
Id. at 938. The Seventh Circuit concluded that because the record did not demonstrate that the nonpublic infor-
mation affected the stock’s price, the fraud on the market theory could not be extended to the nonpublic state-
ments made by the stockbroker. Id. at 938-39.

V. The Use of Damage Experts at Trial

A. General Principles
In the right factual circumstances, experts testifying on damages issues can successfully demonstrate a
lack of causation or fact of injury, show that plaintiffs have not been damaged, or provide the court and jury with
an alternative damage model that results in a damage calculation that is lower than plaintiffs’ damage estimate.
See generally Aronson & Rozwood, supra. When strategizing how to refute plaintiffs’ damage calculations, one of
the most important decisions to make is whether to simply show the flaws of plaintiffs’ methodology and analysis
through cross-examination, emphasize the deficiencies of plaintiffs’ methodology through cross-examination
and through expert testimony, or whether, in addition to those approaches, use a testifying expert to present an
alternative damage model. See Daubert, 509 U.S. at 596 (“Vigorous cross-examination, presentation of contrary
evidence, and careful instruction on the burden of proof are the traditional and appropriate means of attacking
shaky but admissible evidence.”).

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 65

 B. Attack of Plaintiffs’ Damage Methodology through Cross-Examination versus
Presentation of Expert Testimony: The “Texaco v. Pennzoil” Dilemma
In complex commercial litigation such as securities class actions, “the valuation of damages… is not a
‘hard science,’ and all such reports are singularly susceptible to attack.” Goldberger v. Integrated Resources, Inc., 209
F.3d 43, 56 (2d Cir. 2000). Because of the difficulty in estimating damages, it is not unusual for parties to devote a
large amount of time, resources, and expert analysis on damage calculation issues. The options available to de-
fendants when rebutting a plaintiff ’s damage calculations were succinctly summarized by the district court in
Rmed International, Inc. v. Sloan’s Supermarkets, Inc., No. 94 CIV. 5587 PKL RLE, 2000 WL 420548 (S.D.N.Y. Apr.
18, 2000). In that case, investors brought a class action against a company and its chief executive officer under
section 10(b) of the Securities and Exchange Act of 1934, alleging that investors bought stock at artificially high
prices. Id. at *1. In response to defendants’ motion to exclude the testimony of plaintiffs’ damages expert, the
court responded:
Surely, every stock pricing model will be subject to some form of statistical criticism or un-
wanted interpretation…. Nevertheless, to the extent defendants’ concern about Preston’s
analysis are valid, they go to the weight and credibility of her testimony, not its admissibility.
Accordingly, defendants may properly explore any weaknesses in her methodology on cross-
examination or by offering their own expert to rebut her assertions.
Id. at *2 [internal citations omitted; emphasis added].
Texaco, Inc. v. Pennzoil, Co., 729 S.W.2d 768 (Tex. App. 1987), illustrates the risks a defendant takes by not
presenting expert testimony on damages. Pennzoil brought an action for Texaco’s alleged tortious interference
with a contract between Pennzoil and Getty Oil concerning the purchase of Getty Oil Stock. Id. at 785. After the
jury awarded $7.5 billion in compensatory damages, Texaco appealed and argued that the evidence did not
support the jury’s damages award. Id. at 784-85, 859-63. In overruling Texaco’s point of error, the Texas court of
appeals commented:
Our problem in reviewing the validity of these Texaco claims is that Pennzoil necessarily used
expert testimony to prove its losses by using three damages models. In the highly specialized
field of oil and gas, expert testimony that is free of conjecture and speculation is proper and
necessary to determine and estimate damages. Texaco presented no expert testimony to refute
the claims but relied on its cross-examination of Pennzoil’s experts to attempt to show that the
damages model used by the jury was flawed. Dr. Barrow testified that each of his three models
would constitute an accepted method of proving Pennzoil’s damages. It is inevitable that there
will be some degree of inexactness when an expert is attempting to make an educated estimate
of the damages in a case such as this one…. The law recognizes that a plaintiff may not be
able to prove its damages to a certainty. But this uncertainty in calculating damages is toler-
ated when the difficulty in calculating damages is attributable to the defendant’s conduct.
Id. at 861 [emphasis added; internal citations omitted]. In response to that decision, several commentators have
suggested “that Texaco may have taken a calculated risk by declining to present a counter formulation of damages
in its case in chief so as to avoid the appearance of admitting liability or encouraging a compromise verdict.”
Frank Rothman, William P. Frank & Jay S. Berke, Presentation of the Case in Chief, in 2 Business & Commercial
Litigation in Federal Courts §33.9 (Robert L. Haig, ed. 1998). In hindsight, those authors commented that the
dangers Texaco faced with respect to the presentation of an alternative damages model could have been mini-
mized by requesting that the court bifurcate trial on liability and damages issues. See id. In reality, by avoiding
the appearance of admitting liability or encouraging a compromise verdict, Texaco was susceptible to a huge

66 ❖ D&O and E&O Liability ❖ June 2003

damage award if the jury chose to accept plaintiff ’s damage model, and was ultimately hit with a huge verdict
against it.
On a much smaller scale, the Delaware chancery court’s judgment award of damages to plaintiffs in Ryan
v. Tad’s Enterprises, Inc., 709 A.2d 675 (Del. Ch. 1996), aff ’d, 693 A.2d 1082 (Del. 1997), also emphasizes the risk
a defendant takes when it does not offer expert testimony on damages. In Ryan, minority shareholders brought
a statutory appraisal action and an action for fraud and breach of fiduciary duties concerning an asset sale and
“cash-out” merger. The chancery court ruled for plaintiffs and awarded $2 million in damages. 709 A.2d at 678-
80. In a motion for reargument, defendants asserted that the court erred in finding that $2 million was the
proper measure of damages. In denying the motion, the court stated:
[Defendants’] contentions are flawed because the defendants failed to develop an adequate
record to support them. Hence, reargument on this issue is not merited.
As a purely conceptual matter, the defendants are correct in their view that the value as of the
Merger date of the $2 million payments to the Townsends was not $2 million, but an appro-
priately discounted lesser amount. That is because the $2 million would be paid over five years.
However, that argument still does not carry the day, because once the plaintiffs proved (prima
facie) a $2 million damage amount, the burden shifted to the defendants to prove that the
damages award should be less. That burden required the defendants to establish (presumably
through expert testimony) an appropriately discounted figure. At the trial, the defendants never
presented any proof of an appropriate discount rate, not did they otherwise attempt to calcu-
late a discounted damaged figure.
Id. at 679 [emphasis added].
Similarly, dicta from the District Court for the District of New Jersey in In re AremisSoft Corp. Securities
Litigation, 210 F.R.D. 109, 125 (D.N.J. 2002), support the argument that defendants should generally offer expert
testimony on damages. That case involved a consolidated class action against AremisSoft Corporation, individual
executives of the corporation, and numerous other defendants for violations of sections 10 and 20(a) of the Se-
curities and Exchange Act of 1934 and sections 11 and 15 of the Securities Act of 1933. The complaint alleged that
defendants “issued false and misleading statements concerning AremisSoft’s earnings and streams of revenue.” Id.
at 112. The district court ruled that a proposed class settlement was fair and reasonable; and in assessing the risks
of establishing liability and damages, the court stressed the key role that damages experts would play at trial:
[T]he Class would have to overcome damage defenses that Defendants would assert. As is
often the case, the parties would likely engage in a “battle of the experts,” the outcome of which
would be unpredictable. The Court recognizes the very real possibility that a jury could be
swayed by Defendants’ experts seeking to minimize Class Members’ losses or to show that
the losses were attributable to factors other than the alleged misstatements and omissions.
See Robbins v. Koger Properties, Inc., 129 F.3d 617 (11th Cir. 1997) (finding no loss causation
and overturning $81 million jury verdict).
Id. at 125.
The results in these cases suggest that a party and its counsel should carefully evaluate the risk they are
willing to undertake before forgoing any expert testimony on damages issues. If a defendant is concerned that tes-
timony on an alternative damage model will encourage a compromise verdict, an expert witness need not present
an alternative damage methodology or model. Instead, the expert can simply rebut the analysis of plaintiffs’ expert,
providing testimony on the flaws and inaccuracies of plaintiffs’ damage analysis. “Courts have often allowed expert

Effective Use of Experts: From Class Issues to Damages ❖ Rebein, Novion ❖ 67

testimony for the sole purpose of critiquing and thereby helping to explain the work of an expert witness retained
by another party.” In re Blech Sec. Litig., No. 94 Civ. 7696(RWS), 2003 WL 1610775, at *20 (S.D.N.Y. Mar. 26, 2003).

VI. Conclusion
If effective and compelling experts and areas of opinions can be identified and stated, then the expert
testimony can be an important ingredient in the defense of many complex commercial cases. Defendants should
consider the strategic benefits of using experts as consultants to assist in the development of case strategies, and as
testifying experts to provide support for class certification arguments, to strengthen summary judgment posi-
tions, and to present complex liability and damages issues at trial. In order to effectively use experts, attorneys
should strategize about experts’ possible involvement at the onset of litigation, revaluate that assessment through-
out the life of the case, and be aware of legal impediments that may prohibit the use of expert testimony.

Return to Course Book Table of Contents

68 ❖ D&O and E&O Liability ❖ June 2003