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May 2013

Ninth Circuit Upholds Multi-Million Dollar Judgment Notwithstanding Challenges to Damages Expert's Testimony

In Alaska Rent-A-Car, Inc. v. Avis Budget Group, Inc., et al., 709 F.3d 872 (9th Cir. 2013), the Ninth Circuit upheld a multi-million dollar judgment in favor of Plaintiff-Appellee Alaska Rent-A-Car, Inc. (“Alaska RAC”) and against Defendants-Appellants Avis Budget Group, Inc. and its related companies (collectively, “Avis”) for damages arising out of a breach of a settlement agreement. On appeal, Avis challenged the district court’s rulings allowing the jury to hear Alaska RAC’s expert witness’s testimony regarding damages under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharm., 509 U.S. 579 (1993).

Brief Factual Background

Beginning in 1965, Alaska RAC was an exclusive licensee of Avis for the rental of cars in specified areas in the state of Alaska. Under the license agreement, Alaska RAC had the first right of refusal for control of any license Avis planned to grant anywhere in Alaska. The license agreement also gave Alaska RAC the right to expand into new territory as necessitated by Alaska’s unique terrain and weather, as well as varying economic conditions and customer demands.

As time passed, Avis expanded, buying another car rental company called Agency Rent-A-Car (“Agency RAC”) in 1995. In response to this acquisition, some of Avis’s licensees claimed that Avis was breaching its license agreements by essentially operating another car rental company within the licensees’ territory. Avis sued these licensees, seeking a judgment that it was not breaching its license agreements by virtue of its purchase and operation of Agency RAC. Avis settled that suit and entered into a settlement agreement that allowed Avis to purchase additional car rental companies provided that “the sales, marketing and reservation activities, operations and personnel of and for the Avis System will not be utilized to market, provide, and/or make available car rental services” for any additional rental car company purchased by Avis. In other words, the settlement agreement was intended to protect Avis licensees from the risk of Avis’s using its personnel to steer customers away from the licensee and towards another car rental brand.

In 2002, Avis continued its expansion, buying Budget Rent-A-Car (“Budget RAC”) out of bankruptcy. Avis restructured its operations, unifying the Avis and Budget RAC marketing teams, creating a single team to field calls to both Avis and Budget RAC car reservation lines, and combining the companies’ national sales forces. Alaska RAC sued Avis, alleging that Avis had breached the settlement agreement through its acquisition and unified operation of Budget RAC, Alaska RAC’s local competitor in Alaska. Alaska RAC was awarded $16 million dollars following a jury trial. Avis appealed.

The Damages Expert Testimony

On appeal, Avis argued that the district court erred in allowing the jury to hear the testimony of Alaska RAC’s damages expert under Federal Rule of Evidence 702 and Daubert and its progeny. The Ninth Circuit rejected Avis’s arguments, finding that the district court had properly allowed Avis the opportunity to conduct a lengthy voir dire to inquire into the underlying facts and data for Alaska RAC’s expert’s conclusions. After the voir dire, the district court made a proper Daubert “gateway determination,” concluding that the expert was qualified, and that there was sufficient data and “a sufficient causal connection to allow” the expert’s testimony. The district court also ruled that the expert’s testimony would “assist the trier of fact” and was the “result of reliable principles and methods.” The district court determined that any challenges to the expert’s testimony could be raised through cross-examination.

In upholding the district court’s evidentiary rulings on the expert testimony, the Ninth Circuit explained that the “task, for both sides, was to figure out how much business and how much profit Alaska [RAC] had lost on account of Avis’s breach of the settlement agreement.” Such a determination was, “as in any damages case,” a “calculation.. . that address[es] a hypothetical world that never existed, one in which other things remained the same but the breach had not occurred.”

To calculate damages from the breach, as opposed to normal competition, Alaska RAC’s expert compared Avis’s and Budget RAC’s sales performance after the acquisition with that of another national car rental company that had also acquired a car rental company out of bankruptcy. Alaska RAC’s expert opined that Avis, and the acquired company, Budget RAC, both got infusions of capital and management enabling both of them to compete, which in turn allowed the companies to benefit from merging and unified sales and marketing activities. The expert also opined that the merged sales and marketing also allowed Budget RAC to recover from bankruptcy much more quickly.

As an example, Alaska RAC’s expert calculated Alaska RAC’s decreased market share of the car rentals originating from the Juneau airport after Avis’s acquisition of Budget RAC. The Juneau airport could provide a simple example of the impact of the acquisition based on sales before and after Budget RAC entered the market. The expert estimated that Budget RAC obtained about 48% of its market share from Alaska RAC customers, and 53% from other car rental competitors. Based on this reallocation of market share and Budget RAC’s accelerated recovery from bankruptcy, the expert determined that Alaska RAC suffered lost profits of $4.079 million from 2003 to 2008, and future lost profits of $11.708 million as discounted to present value.

Avis attacked these expert conclusions, arguing that the expert’s assumptions and comparisons were divorced from differences in the facts surrounding Avis’s acquisition of Budget RAC. Avis also challenged the expert’s conclusions on the grounds that the application of a national market share comparison to the Alaska market ignored the differences between the two markets. Avis claimed that the expert’s extrapolation of market share data from the Juneau airport market failed to account for the differences between that small market and the markets elsewhere in Alaska.

The Ninth Circuit rejected these challenges, finding that Alaska RAC’s expert gave sufficient reasons for his use of the Juneau market, including the clarity with which the Juneau market could be examined as to Alaska RAC’s market share before and after Budget RAC’s market entry. The Ninth Circuit held that “[a]ll of Avis’s challenges to Alaska [RAC’s] are colorable, but none go to admissibility. They amount to impeachment.” The Ninth Circuit reasoned that Federal Rule of Evidence 702 allows the trial court to “exercise discretion to allow expert testimony if the testimony ‘will assist the trier of fact to understand the evidence or to determine a fact in issue;’ (1) it is ‘based upon sufficient facts or data;’ (2) it is ‘the product of reliable principles and methods;’ and (3) the expert ‘has applied the principles and methods reliably to the facts of the case.’” The Ninth Circuit held that under Daubert, [T]he court must assess [an expert’s] reasoning or methodology, using as appropriate such criteria as testability, publication in peer reviewed literature, and general acceptance, but the inquiry is a flexible one. Shaky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion. In sum, the trial court must assure that the expert testimony ‘both rests on a reliable foundation and is relevant to the task at hand.’”

The Ninth Circuit emphasized that the Daubert reliability requirement “is flexible” and “Daubert’s list of specific factors neither necessarily nor exclusively applies to all experts or in every case. . . The ‘list of factors was meant to be helpful, not definitive’ and the trial court has discretion to decide how to test an expert’s reliability as well as whether the testimony is reliable, based on ‘the particular circumstances of the particular case.’” In short, the “judge is supposed to screen the jury from unreliable nonsense opinions, but not exclude opinions merely because they are impeachable. The district court is not tasked with deciding whether the expert is right or wrong, just whether his testimony has substance such that it would be helpful to a jury.”

Accordingly, the Ninth Circuit held that all of Avis’s challenges to Alaska RAC’s expert went to the weight and credibility of the expert’s testimony, not to its admissibility. Therefore, the Ninth Circuit held that the district court did not abuse its discretion in allowing the jury to hear the expert’s testimony.

Intellectual Property

Hazel Mae B. Pangan

Intellectual Property