Expert discovery in litigation can be highly important and draft reports continue to be a hot-button issue. A recent contract dispute, litigated in federal court, in which the defendant tried to exclude the opposing expert for violating federal expert disclosure requirements, is a case in point.

The plaintiff, Maricopa County, Ariz. (Maricopa), sued Office Depot, alleging the defendant had breached a pricing commitment Office Depot had made to certain state and local public agencies. Both parties presented expert testimony and tried to exclude the rivaling experts (Maricopa retained two experts) under Rule 702/Daubert. Moreover, Office Depot claimed one of the plaintiff’s experts was precluded from testifying because the plaintiff violated Rule 37 of the federal rules of civil procedure, which specifies sanctions for failure to make disclosures or cooperate in discovery, including prohibiting the expert from testifying “unless the failure was substantially justified or is harmless.”

Little guidance on what’s a draft: At his deposition, the expert said that the report he had sent to the plaintiff had a spreadsheet attached that had an extra column titled “Notes,” in which he “listed out [his] thinking and questions” regarding certain items he was asked to examine. Asked whether the “Notes” column was included in his final report, he said, “I believe so.” The plaintiff did not provide the “Notes” column in the final version of the report that went to the defendant. In its motion, Office Depot claimed the plaintiff altered the report and deprived Office Depot, the court, and the jury access to the expert’s “true opinions.” Rule 26(a)(2)(B)(i) requires that an expert report include “a complete statement of all opinions the witness will express and the basis and reasons for them.”

According to the plaintiff, the notes-containing version of the expert report was a draft and was not discoverable. Rule 26 protects as work product “drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.” The key issue was whether the notes-containing version of the report was a draft. “The case law, somewhat surprisingly, provides little guidance when it comes to determining whether an expert’s report was a draft or final version,” the court said. It concluded the report the plaintiff produced to Office Depot was a complete statement of the opinions the expert would express, including the reasons for his opinions. The earlier notes-containing version was a draft. The court noted that this expert did not have much experience as an expert and “it would be unusual for a final report to contain this sort of raw information.” It said Office Depot did not take issue with the “reasoning and explanation provided in the report” but simply argued it should have received the version the expert originally sent to the plaintiff. “This bolsters the conclusion that the analysis contained in the final, produced version constituted a complete expression of [the expert’s] opinions.”

Many, but not all, states have procedural rules that align with the federal rules of expert discovery. It is critical that experts are familiar with the rules applicable in the jurisdiction in which they practice.

County of Maricopa v. Office Depot Inc., 2019 U.S. Dist. LEXIS 175695 (Oct. 9, 2019)

In the Columbia Pipeline statutory appraisal action, the Delaware Court of Chancery recently rejected the petitioner expert’s discounted cash flow analysis to determine fair value and, in a short but noteworthy discussion, explained why the court has come to question the usefulness of the DCF in many instances.

This case featured a publicly traded company that owned and operated natural gas pipelines, storage, and other related assets. The Court of Chancery, after an exhaustive evaluation of the sale process, found the deal price was the best evidence of fair value despite flaws (some material) in the sale process. There were “objective indicia of deal price fairness,” the court said. The deal price was $25.50 per share.

Problematic ‘back-loading’: The court rejected the use of the trading price, finding that, under the facts, an analysis of the trading price was “comparatively unimportant.”

The petitioners, claiming the sale process was fatally flawed and undermined the deal price for appraisal purposes, advocated for the use of their expert’s discounted cash flow analysis. The DCF valuation arrived at a per-share price of $32.47. While the respondent’s expert critiqued the opposing expert’s DCF model, he did not do his own DCF valuation.

The court, referencing precedent Delaware Supreme Court decisions, declined to give the DCF here any weight. “Dell and DFC teach that a trial court should have greater confidence in market indicators and less confidence in a divergent expert determination.” The court noted the petitioners’ DCF valuation was out of sync with market indicators. It was 27% higher than the deal price and 64% higher than the unaffected trading price.

The court noted the experts disagreed over various inputs. The choice of inputs was a proper subject of debate and the outcome of the debates resulted in large swings in the valuation output, the court observed. Calling the DCF a “second-best method” in this case, the court declined “to call the balls and strikes of the valuation inputs.” At the same time, the court noted that, since Columbia’s business plan projected major capital expenditures between 2016 and 2021, leading to negative cash flow of nearly $4 billion during the five-year projection period, all of the positive value was generated in the terminal period in the petitioner expert’s DCF. The terminal value in that calculation represented 125% of the valuation of Columbia, the court observed. “This court has questioned the utility of a DCF in a case where the terminal value represented 97% of the result,” the court said. In a footnote, it cited other decisions that criticized DCF valuations where the terminal value accounted for over 75% of the total present value or where the terminal value derived from the use of the exit multiples method comprised 70% to 80% of present value. This “back-loading” showed the risks related to the use of the DCF and undermined its reliability, the court said. “This decision therefore does not use it.”

In re Appraisal of Columbia Pipeline Grp., Inc., 2019 Del. Ch. LEXIS 303 (Aug. 12, 2019).