Two Economic Damages Cases Dismissed for Lack of Reliable Valuation Evidence
Business Valuation Advisor, Fall 2007

Gordon Partners v. Blumenthal, 2007 U.S. Dist. LEXIS 9110 (February 9, 2007); AccuWeb v. Foley & Lardner, 2007 Wisc. App. LEXIS 61 (January 31, 2007)

Two recent cases demonstrate what happens when plaintiffs fail to provide diligent, well-prepared valuation testimony to support their loss causation analysis—and what happens when the defense does.

Securities Claims Require Reliable Market Study

The Gordon plaintiffs were hedge fund partners who had invested most of the fund’s assets in NTL, Inc., with whom the partners had personal as well as business ties. At the start of 2000, an NTL share was worth over $100, and the hedge fund’s entire investment was worth $30 million.

Within eight months, the NTL price declined to $44, and by May of 2001 to $31. Even so, the Gordon founder admitted he would not have sold NTL until its price dropped to $27.50 in mid-May. But at that time, the company announced a 32 percent increase in quarterly EBITDA and stated it was on track to reach its financial goals. The plaintiffs alleged that NTL made similar misleading statements through a major acquisition and attempted restructuring despite knowing that both were plagued with serious problems. NTL stock dropped to an “all-time low” of $1.50 in September 2001, and bankruptcy followed in April 2002, wiping out all of the hedge fund holdings.

Alleging fraud and misrepresentation against NTL and its individual members (the defendants), the Gordon plaintiffs sought damages amounting to over $16 million for the period January 2000 through April 2002, calculated by relying on the price they paid for NTL stock as of August 2000.

The plaintiffs did not submit an expert report—but the defendants did. Their expert testified that the plaintiffs’ damage calculations lacked any reliable basis because they failed to adjust for market, industry, and company-specific factors that affected NTL’s price during the loss period but were unrelated continued on next page 2 to any alleged fraud, including a marked decline in the telecommunications industry.

Moreover, the defendants’ expert conducted a comprehensive, chronological assessment of public information available about NTL during the loss period, using regression analysis to study the material effect of each major report and finding few significant price reactions related to these publicized risks.

The plaintiffs called such analysis an academic exercise and nonsense. In response, the defendants asserted that the courts require “reliable principles and methods” to exclude unrelated price declines from any estimate of damages. The plaintiffs had merely booked all such declines into their measure of damages, and the court agreed, dismissing all of their claims.

Fair Market Value of Patent Requires Proof

In the second case, attorneys for plaintiff AccuWeb apparently allowed a technology patent to expire in 1995 by failing to pay a maintenance fee; AccuWeb sued, alleging legal malpractice and damages based on: (a) the loss of a potential sale of the company due to the loss of the patent; (b) the loss of the fair market value of the patent; and (c) the diminution of the future resale value of the business.

The attorneys filed for summary judgment on all claims based on a lack of causation as well as failure to prove damages with a reasonable degree of certainty. The appeals court agreed there was insufficient proof tying the lapse of the patent with the loss of the potential sale, which apparently failed due to general economic conditions.

As to the loss of the patent itself, AccuWeb claimed uncontroverted proof of its fair market value but failed to explain what that value was or how a trier of fact could determine the amount. “More fundamentally,” the court said, “AccuWeb has not by way of testimony or affidavit demonstrated it has suffered any damages simply because the…patent lapsed.”

AccuWeb did submit an expert report attempting to show its diminished value. The expert calculated damages as the difference between the value of the company’s assets with the patent ($5 million to $10 million under the market approach, $6 million to $18 million under the income approach) and its value without the patent ($1.7 million to $3 million) on the date of the valuation report in November 2002. But the court found that the expert should have valued the patent as of the lapse date in 1995. (The dissenter disagreed, arguing that the date of the report had no bearing on damages, which could be measured on an ongoing basis up until the date of trial.)

Further, the expert assumed that without the patent, future competitors would be able to introduce similar technologies impacting AccuWeb’s value, but the court found this speculative. No competitors had in fact exploited the unpatented technology, and AccuWeb was unable to point to any who might with reasonable certainty.

Finally, a 1997 valuation of the company (two years after the patent lapse) had estimated its worth between $8.5 million and $11.5 million, with a “strategic value” of up to $22 million. These values fit within the expert’s “undamaged” valuation as of 2002, and AccuWeb did not adequately reconcile the asserted damaged values to the 1997 appraisal. Though the dissent argued that the expert report raised a material dispute, the majority summarily dismissed all claims.