Parkway Neuroscience v. Katz, Abosch, etc., PA ( 2022 )

Parkway Neuroscience and Spine Institute, LLC v. Katz, Absoch, Windesheim, Gershman
& Freedman, P.A., et al., No. 658, September Term, 2021, Opinion by Adkins, J.
EVIDENCE-EXPERT TESTIMONY: The admissibility of expert testimony is largely
within the discretion of the trial court. Such a ruling, however, may be reversed on appeal
if it is founded upon an error of law. Judges making discretionary rulings must apply correct
legal standards.
EVIDENCE—DAUBERT-ROCHKIND: A trial court, in its gatekeeper role under
Rochkind and Daubert, acts improperly in excluding the testimony of a qualified certified
public accountant testifying about lost profits of an LLC medical practice―on grounds that
the expert’s experience with such analysis, although extensive, had only included one
medical practice. Any lack of specialized experience is ripe for cross-examination at trial.
EVIDENCE—DAUBERT-ROCHKIND: Trial court erred in holding expert testimony
unreliable under the Daubert-Rochkind standard after accepting expert’s methodology—
the before-and-after method of calculating lost profits. Court’s rationale was (1) using
2015 as the base year; (2) failing to consider changes in insurance reimbursement rates; (3)
failing to articulate standards to define economic impact and treat member draws; (4)
changing her calculations while the underlying facts remained the same; and (5) failing to
offer calculations for profit loss based on variable jury determinations. None of these
criticisms addressed methodology, and they were more appropriate for cross-examination
and advocacy at trial.
EVIDENCE—MARYLAND RULE 5-702: Maryland Rule 5-702 requirement that there
is “a sufficient factual basis” supporting the testimony does not justify a trial court’s
exclusion of such testimony based upon the correctness of the expert’s conclusions.
“[A]nalytical focus should be on principles and methodology. Trial courts may not reject
expert testimony simply because they disagree with the conclusions reached by the
witness.” Jack B. Weinstein, Weinstein’s Federal Evidence 702.05[2][a] (2d ed. 1997).
Circuit Court for Howard County
Case No. C-13-CV-18-000181
REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 0658
September Term, 2021
______________________________________
PARKWAY NEUROSCIENCE AND SPINE
INSTITUTE, LLC
v.
KATZ, ABOSCH, WINDESHEIM,
GERSHMAN & FREEDMAN, P.A., ET AL.
______________________________________
Berger,
Friedman,
Adkins, Sally D.
(Senior Judge, Specially Assigned),
JJ.
______________________________________
Opinion by Adkins, J.
______________________________________
______________________________________
Filed: September 30, 2022
In 1978, the Maryland Court of Appeals adopted the Frye standard for expert
testimony, which allowed admission of an expert’s testimony if the basis of that opinion
“ha[d] gained general acceptance in the particular field in which it belongs.” Reed v. State,
283 Md. 374, 381 (1978) (quoting Frye v. U.S., 293 F. 1013, 1014 (D.C. Cir. 1923)). Thus,
Maryland’s Frye-Reed standard was born. During its tenure as the evidentiary standard for
expert testimony admission in Maryland, the Supreme Court adopted a new standard for
admission of scientific expert testimony in federal courts, commonly referred to as the
Daubert1 standard. Rather than focusing on the general acceptance of the expert’s
methodology—like in Frye—the Daubert standard focuses on the reliability of the
methodology. See Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579, 589–90 (1993).
The Supreme Court later expanded the reach of Daubert by applying the standard
to admission of expert testimony that was non-scientific in nature. Kumho Tire Co., Ltd.
v. Carmichael, 526 U.S. 137, 141 (1999). The supermajority of states had already jumped
aboard the Daubert train when Maryland followed suit. In 2020, our Court of Appeals
overruled Reed v. State and adopted Daubert as the new standard for admission of expert
testimony in Maryland. Rochkind v. Stevenson, 471 Md. 1, 5 (2020). Although Maryland
courts had used a “Frye-Reed Plus” standard2—which considered some of the Daubert
factors—applying the new Daubert-Rochkind standard and sifting through the thousands
1
Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993).
2
“In the forty years that followed Reed, Maryland experienced a jurisprudential drift: the
Frye-Reed standard announced in 1978 slowly morphed into a “Frye-Reed Plus” standard,
implicitly and explicitly relying on and adopting several Daubert principles.” Rochkind v.
Stevenson, 471 Md. 1, 5 (2020).
of cases applying the Daubert standard may pose a challenge to circuit courts—as it did in
the case at hand.
Parkway Neuroscience and Spine Institute, LLC (“PNSI” or “Appellant”) brought
suit against Katz, Abosch, Windesheim, Gershman & Freedman, P.A. (“Katz Abosch”)
and Mark Rapson (collectively, “Appellees”)—its previous accounting firm and main
accountant. As a remedy, PNSI is seeking lost profits damages. In order to establish lost
profits damages, PNSI proffered the expert testimony of Meghan Cardell, a Certified
Public Accountant (“CPA”). Appellees moved to exclude Ms. Cardell’s testimony—
asserting that the methodology she employed was unreliable—and to strike the lost profits
claim. After a Daubert hearing, the Circuit Court for Howard County agreed with
Appellees and granted their motion to exclude Ms. Cardell’s testimony and strike the lost
profits claim. The circuit court—over PNSI’s opposition—granted the Appellees’ motion
for summary judgment on all remaining counts. PNSI timely appealed.
PNSI presents us with the following questions:
1. Did the Trial Court Abuse its Discretion in Granting Defendants’
Renewed Motion to Strike Plaintiff’s Lost Profits Claim and Exclude
Plaintiff’s Experts Based on New Daubert Standard and Barring Meghan
Cardell from Presenting Expert Testimony Regarding PNSI’s Lost
Profits?
2. Did the Trial Court Erroneously Conclude that Ms. Cardell was not
Qualified to Render an Expert Opinion Regarding the Lost Profits of a
Medical Practice?
3. Did the Trial Court Erroneously Conclude that Ms. Cardell’s Testimony
Would Not Assist the Trier of Fact?
For the following reasons, we reverse.
2
FACTS AND PROCEDURAL HISTORY
PNSI is a mixed-specialty medical practice whose practitioners provide treatment
for brain, spine, and peripheral nervous system disorders. Starting in 2011, PNSI began to
expand its operation with the hiring of more physicians and support staff. Between 2013
and 2014, PNSI had ten physician members who owned the practice. Since none of the
members had the necessary background in finance and accounting, PNSI entered into a
written agreement in October 2013 with Katz Abosch to provide tax, accounting, “and
financial guidance and direction to help PNSI continue to grow its practice.”
Appellee, Mark Rapson, is a CPA and Chair of Katz Abosch’s Medical Services
Group. Mr. Rapson—assisted by the CEO of Katz Abosch and another senior
accountant—was in charge of PNSI’s account. PNSI normally reconciled its books at the
end of the year, so Appellees allegedly agreed to prepare the reconciliation beginning at
the end of 2013. According to Appellant, Katz Abosch recommended that PNSI wait to
make its end-of-year reconciliation payments until October 2014. At that time PNSI paid
four members a total of $422,897 in reconciliation payments. PNSI alleged that Katz
Abosch and Mr. Rapson failed to properly evaluate PNSI’s financial position before
making this recommendation.
“Between 2012 and 2014, PNSI received payments totaling over $400,000 as part
of the Medicare and Medicaid Electronic Health Record (EHR) Incentive Program,” which
are also referred to as meaningful use payments. These meaningful use payments are
subject to audit and recovery. Allegedly on the advice of Katz Abosch and Rapson, PNSI
deposited the meaningful use payments in PNSI’s general funds for member distribution.
3
Soon after, PNSI was required to repay over $400,000 in meaningful use payments to the
government. To do so, PNSI alleged, it had to take out a loan.
According to Appellant, Katz Abosch and Rapson proposed a compensation model
to PNSI’s board in early 2014. Under this compensation model, each member, regardless
of their specialty, was allocated an equal portion of two-thirds of PNSI’s net increase or
decrease in fixed expenses and a portion of the remaining one-third of PNSI’s net increase
or decrease in expenses based on that member’s net collections for the period. PNSI
alleged that this model did not address the unique issues of its mixed medical practice. Nor
did it provide a reserve for future expenses or Katz Abosch’s annual accounting fees.
Despite this, PNSI—allegedly relying on Katz Abosch’s advice—adopted the proposed
compensation model.
After following Katz Abosch’s advice on reconciliation payments, meaningful use
payments, compensation models, and future payments, PNSI alleged, it was “deeply in
debt.” Allegedly, as a result of this debt and Appellees’ actions, seven of PNSI’s nine
members3 left the practice, causing further financial difficulty and lost profits.
PNSI sued Katz Abosch and Rapson for accountant malpractice and negligent
misrepresentation in June 2018. In this suit, PNSI included counts against Katz Abosch
for breach of contract and unjust enrichment.
3
PNSI alleged in its complaint that it had ten members between 2013 and 2014 and eight
members left as a result of Appellees’ conduct between 2015 and 2016. PNSI stated in its
brief, however, that seven of its then-nine members left the practice. This discrepancy does
not affect the outcome of this decision.
4
PNSI retained Meghan Cardell as an expert to testify regarding damages and lost
profits. In June 2019, Appellees filed a Motion to Compel Certain Depositions and Request
for Hearing seeking to depose PNSI’s witnesses, including Ms. Cardell. Appellees’ motion
was denied. In July 2019, Appellees moved to strike PNSI’s lost profits claim and exclude
Ms. Cardell’s testimony. Appellees’ motion was again denied. In February 2020,
Appellees moved for leave to take certain depositions, including Ms. Cardell’s. This too
was denied.
When this litigation began in 2018, Maryland followed the Frye-Reed standard for
admissibility of expert witnesses. The Frye-Reed standard required that the principles
underlying an expert’s opinion be generally accepted within their professional community.
Reed, 283 Md. at 381 (holding that “before a scientific opinion will be received as evidence
at trial, the basis of that opinion must be shown to be generally accepted as reliable within
the expert’s particular scientific field”).
In August 2020—as this case was pending—our Court of Appeals overruled Reed
and adopted the United States Supreme Court’s standard set forth in Daubert. Rochkind,
471 Md. at 5. “Daubert . . . refocuses the attention away from acceptance of a given
methodology—although that is not totally removed from the calculus—and centers on the
reliability of the methodology used to reach a particular result.” Id. at 31. The Court set
forth the five Daubert factors and an additional five factors as follows:
(1) whether a theory or technique can be (and has been) tested;
(2) whether a theory or technique has been subjected to peer
review and publication;
(3) whether a particular scientific technique has a known or
potential rate of error;
5
(4) the existence and maintenance of standards and controls; .
..
(5) whether a theory or technique is generally accepted[;] . . . .
(6) whether experts are proposing to testify about matters
growing naturally and directly out of research they have
conducted independent of the litigation, or whether they have
developed their opinions expressly for purposes of testifying;
(7) whether the expert has unjustifiably extrapolated from an
accepted premise to an unfounded conclusion;
(8) whether the expert has adequately accounted for obvious
alternative explanations;
(9) whether the expert is being as careful as he [or she] would
be in his [or her] regular professional work outside his [or her]
paid litigation consulting; and
(10) whether the field of expertise claimed by the expert is
known to reach reliable results for the type of opinion the
expert would give.
Rochkind, 471 Md. at 35–36 (citations omitted).
This new standard applies to “‘any . . . cases . . . that [were] pending on direct appeal
when [the Rochkind opinion was] filed, where the relevant question ha[d] been preserved
for appellate review.’ In this context, the ‘relevant question’ is whether a trial court erred
in admitting or excluding expert testimony under Maryland Rule 5-702 or Frye-Reed.” Id.
at 38–39 (internal citations omitted).
Relying on this change to our evidentiary law, Appellees filed a renewed motion to
strike PNSI’s lost profits claim and exclude Ms. Cardell’s expert testimony on May 5,
2021. The circuit court ordered an evidentiary hearing to be conducted on Appellees’
renewed motion in light of the new Daubert-Rochkind standard and allowed Appellees the
opportunity to depose Ms. Cardell. At the hearing, the parties and trial judge questioned
Ms. Cardell about her qualifications and how she calculated PNSI’s lost profits.
6
Ms. Cardell graduated from the University of Richmond with a Bachelor of Science
in Accounting and a Bachelor of Arts in Leadership Studies. She has been a CPA since
2011—having passed all four sections of the CPA exam on her first try—and is also a
Certified Fraud Examiner. Ms. Cardell is also a member of the American Institute of
Certified Public Accountants and the Association of Certified Fraud Examiners, as well as
an associate member of the American Bar Association. She is the Director of her group—
Disputes and Investigations Services—at the consulting firm Alvarez and Marsal. Ms.
Cardell—through her employer—provides litigation services to various entities, typically
about accounting issues, damages, and lost profits calculations. Ms. Cardell has conducted
dozens of economic damages calculations throughout her career—the main type of
calculation being lost profits calculation. Ms. Cardell testified that she had conducted at
least one lost profits analysis regarding a medical practice.
Focusing on methodology, Ms. Cardell explained several well-accepted methods to
calculate lost profits and why she chose the “before-and-after” method. She first explained
why she did not utilize other popular methodologies. She did not use the “contractual
damages” method because such a method is only used when the contract specifies a
formula or method to be used if the contract is breached—which was not present in PNSI
and Katz Abosch’s contract.
Ms. Cardell also considered the “lost business value” or “diminution in value”
method. She explained that such a method is used when the alleged harm causes permanent
impairment to future earnings of the business. Although Ms. Cardell thinks there may be
some evidence of permanent injury due to the loss of doctors and their revenue streams,
7
she believes that over time—by replacing doctors and increasing revenue—the practice
may recover.4
Another method Ms. Cardell considered, the “yardstick” method, is often used for
companies where there is not—or not enough—historical data on lost profits. The
yardstick methodology is not applicable here—according to Ms. Cardell—because PNSI
has historical profit data to analyze.
Ms. Cardell chose the before-and-after method, which, she said, was the most
commonly used method to calculate lost profits. This and the above methods, she said,
have been
commonly used in lost profits calculations, they are written
about in literature, and specifically, they are named in what’s
called the AICPA Practice Aid for calculating lost profits. And
that’s really the, sort of the guiding handbook for damages
experts and accountants who are calculating lost profits.
Ms. Cardell further explained that she has used the before-and-after method
“many, many times” and has “seen it used by other experts both in and out of litigation
settings to calculate lost profits.”
[MS. CARDELL]: [U]nder the before and after methodology
what happens is that the damages expert looks at the Plaintiff’s
performance in two different periods. The first being what we
called the benchmark period or the before period. And that’s
the period that is unaffected by whatever the alleged harm
event, breach is. And then that is [compared] to the after period
or the loss period, which is the period that is affected by
4
Ms. Cardell further noted that this methodology is not applicable because the diminution
in value method is about future lost profits. Due to the effects of the COVID-19 pandemic,
PNSI abandoned its lost profits claims for 2020 through 2025. Cardell subsequently
updated her written report to calculate only actual lost profits damages from 2015 through
2019.
8
whatever the alleged harm, breach, or event is. This
methodology essentially calculates what the Plaintiff’s profits
would have been but for again that alleged breach, harm event.
In this case, the alleged harm event was the exodus of members leaving PNSI’s practice.
Ms. Cardell used the exodus of members from PNSI as the benchmark or “before”
period —a period reflecting PNSI’s profits when all (or most) members were still working
at PNSI. As she testified, the first doctor withdrew in June 2015, a few more doctors at the
end of 2015, and the final three or four left in early 2016. The harm event—the exodus of
PNSI members—occurred during the one-year period from June 2015 to June 2016. Ms.
Cardell explained that because it is difficult to look at a half-year to determine profitability,
she used 2015 as the before period—or the base period. Ms. Cardell further clarified why
she chose 2015 as the base period.
[MS. CARDELL]: So I used 2015 as the before [period],
because there was really only [one] doctor who left in June and
the others didn’t leave until the end of 2015. So their revenues
would have been included in 2015. So 2015 is the before
period.
Ms. Cardell opined that 2015 was a good proxy for what future profits would have
been, but for the harm event.
[MS. CARDELL]: [T]his business had profits in 2015 it was
growing, the practice had been growing they were investing in
growth. The practice had sort of hit its stride in 2015 and if
you’re looking at sitting in 2015 what does the market look like
for this business? What’s going to happen to this, this industry
in the future? You can see a couple things. One that’s
important is that this industry is medical care. It’s very
different from a consumer good, or some sort of luxury good,
or service that might be more subject to swings of consumer
preference or economic swings. We’re thinking, we’re talking
about, you know, folks getting medical care which is
9
something that is needed, these people need medical care to
continue to live their lives in a productive way. So it’s an
industry that’s not as open to the swings of consumer
preference. Especially this case, when we’re talking about
such a niche practice where there wasn’t much else around to
be able to service the patients in the same way.
You also see, if you’re sitting in 2015 and this continues
to be true today, that the medical industry, the medical
specialty industry specifically, was projected to grow. Because
we have an aging baby boomer population, we have a
prevalence of chronic diseases and chronic issues. And so if
you look at the market back in 2015 it would tell you that
medical practice specialties and medical practices in general
were projected to grow. And so I was able to get comfortable
with that that 2015 would be a reasonable proxy for the future.
It doesn’t even account for the potential growth. I could have
grown 2015 over time to say well yes, they were making “X”
amount in 2015. But they would have been making “X” plus
in ’16, ’17, ’18.
Ms. Cardell noted that she obtained information about PNSI’s business from doctors in
the practice, as well as the company’s accounting manager.
The circuit court asked Ms. Cardell if there was a professional standard for choosing
the base period, especially the length of the base period. Ms. Cardell explained that the
benchmark can be based on a one-year period, so long as it is a reasonable prophecy for
future profits. The judge questioned why Ms. Cardell chose to use 2015 as the base period
and not earlier years, such as 2014.
[THE COURT]: Why did you exclude 2014?
[MS. CARDELL]: I didn’t use 2014 because the company had
been in a period of growing and the expenses, when you are
growing a business, the expenses tend to grow which makes it
look like you have less profit. So I looked at the revenue trends
over time and saw that those were growing. And by 2015 I
thought the business had really sort of hit its sweet spot in terms
10
of, they had invested the money they needed to be able to
continue that growth in a profitable way.
* * *
[THE COURT]: I mean, the – what occurred in 2014 wasn’t
unusual, was it?
[MS. CARDELL]: I wouldn’t say it was entirely unusual.
There will be other expenses. But once you see in 2015 that
they were sort of out of that what I call kind of the squeeze
period.
[THE COURT]: Uh-huh.
[MS. CARDELL]: And you get to a point where you are
profitable. There will be other expenses, but I thought 2015
was a better representation of what that level of expense would
be moving forward as compared to 2014.
After considering Ms. Cardell’s testimony and each party’s arguments, the circuit
court granted Appellees’ motion and ruled that PNSI did not meet the burden necessary to
allow Ms. Cardell’s expert testimony at trial. The circuit court was first concerned with
Ms. Cardell’s lack of experience conducting lost profits calculations for unique medical
practices, such as PNSI.
[THE COURT]: [T]his is not your typical ma and pa hardware
store kind of business. This is a business model that deals with
a medical practice that has alternate streams of revenue that
have alternate considerations when trying to determine
expenses and things of that nature. And there was nothing
about this witness’s background that showed that she had any
special exposure to this.
In addition to concerns about Ms. Cardell’s lack of specialized experience, the
circuit court found her selection of 2015 as the base period to be “speculative.” The court
doubted “the quality of the information that she was using” because she relied heavily on
11
PNSI’s assertions and lacked independent sources. The circuit court also questioned the
usefulness of Ms. Cardell’s testimony to the jury.
The judge distilled his reasons for excluding Ms. Cardell as he walked through the
Daubert-Rochkind factors.
Factor One. The circuit court acknowledged the acceptability of the before-and-
after method of calculating lost profits―calling it “old school” and saying it “certainly can
be tested.” But the court found that Ms. Cardell’s calculations in this case could not be
tested. It believed that Ms. Cardell made too many subjective decisions and assumptions
for the court to determine how to test her calculations—for example, what “economic
impact”5 is and why she chose 2015 as the base year for her calculations.
5
Ms. Cardell explained that the phrase “economic impact” or “financial impact” is a term
of art used by experts in her industry to determine the impact that a deduction or adjustment
might have on the profitability of the business from an economic perspective. She
explained that the phrase is also used outside of litigation, such as in mergers and
acquisitions.
[MS. CARDELL]: I have had, [sic] done work in the past in
mergers and acquisitions let’s say. So not, not litigation
related. And in those situations, when someone’s coming in
and buying a business they also do a similar normalizing
adjustment to normalize the earnings because you don’t want
to pay somebody for a business for earnings that you are not
going to get in the future.
So it is a, as I said it’s a concept, because you want to
get the real economics of the business you’re buying. So it’s
not something in my experience that is limited to litigation, it
applies across [a] sort of financial principals, economic and
financial principles.
Ms. Cardell further noted the economic impact is based solely on accounting records, not
causation or what caused lost profits, and was not a part of her analysis.
12
Factors Two and Three. The circuit determined that the peer review factor did not
apply in this case. It found that factor three―whether the technique has a high error
rate―favored exclusion of Ms. Cardell’s testimony. The court noted that Ms. Cardell
changed her calculations even though the facts underlying her calculations remained the
same. Ms. Cardell revised her calculations to get rid of projected lost profits for January
2020 onward, due to the COVID-19 pandemic. She further updated her calculations a
second time shortly before her deposition.
[MS. CARDELL]: [W]hen I was preparing for my deposition
I was re-reviewing all the accounting records and I identified
an adjustment, a normalizing adjustment that I thought should
be made and I made that adjustment. And that lowered the lost
profits number for my client. But I believed it was the right
answer to do and right adjustment to make regardless of the
impact on the number.
[THE COURT]: I’m sorry, what was this adjustment? Which
adjustment are we talking about?
[MS. CARDELL]: [I]f you look on schedule two in 2015 and
2016 you’ll see there’s a trauma and on call adjustment.
[THE COURT]: Right.
[MS. CARDELL]: For a positive $319,000.00 in 2015. And
a negative $395,000.00 in 2016. And that had to do with
certain trauma and on call monies that were paid in a year to
which they didn’t relate. And so to normalize that I shifted the
expense into the right year which caused lost profits to be
reduced. But I, I believe it was the right answer from an
economic perspective.
Ms. Cardell assured the circuit court that she again thoroughly reviewed the
documents and details of her calculations so that no other adjustment was likely to be
13
needed in the future. Unmoved, the court considered the calculations to be subjective and
subject to error.
Factor Four. The court determined that there was limited existence of standards or
controls, which favored exclusion. “[T]here was very little evidence of any standards o[r]
controls that exist.” The court said that Ms. Cardell could not articulate standards for
defining “economic impact” or for how to treat member draws in a lost profits calculation.
An interchange between the judge and the expert transpired about treatment of
member draws. Ms. Cardell said that these draws are guaranteed payments that each doctor
receives, which are made up of salary and include, inter alia, revenues from trauma and
on-call payments. She opined that a business can decide to distribute its earnings in
whatever way it wishes for tax purposes, but that these draws are expenses for the
corporation—as the doctors are not going to work for free. The court took issue with this.
[THE COURT]: I guess there’s two ways to look at it, way
one is that if I own a business and when I finish paying all my
expenses out including my…cashier for widgets if there’s
$100.00 left if I don’t take a penny of it that’s a $100.00 profit
for my business.
* * *
[THE COURT]: It seems to me that there’s a disagreement in
this case. That if I take $100.00 as the owner of the business
one line of thought is the company has made no profit that year
because I paid myself $100.00. The other thought seems to be
I’m the owner, I’m not entitled to anything. What I get is what
I take and it’s not an expense, it’s not a capital [sic] or anything
like that. So it’s irrelevant how much my draw is on the profit.
The company itself still made $100.00 profits. And if I take
$100.00, all of it is still $100.00 profit. If I take $5.00 it’s
$95.00, you know, it’s still $100.00 profit. It seems like there’s
14
the struggle in this case like that. For purposes of calculating
lost profits in the accounting industry which is it?
Ms. Cardell explained that she talked with another accounting and lost profits expert
about the treatment of member draws and has researched industry standards on how to treat
member draws. But—according to Ms. Cardell—there is no industry standard for this issue
because the question of how to treat salaries and member draws in lost profits calculations
depends on the business. Based upon her research and understanding of damages theory,
she opined, “if the business makes $100.00 regardless of whether it stays in the business
or is given to a shareholder or an owner, or a member, those are still the business’s profits.”
Factors Five and Six. The court agreed that the before-and-after method of
calculating lost profits has been generally used by qualified professionals for quite some
time. But it decided that factor six favored exclusion because Ms. Cardell developed her
calculations in preparation for litigation, not independently.
Factor Seven. The court believed that the “unjustifiably extrapolated” factor
favored exclusion “if the premise that we’re talking about from which the unfounded
conclusions roles [sic] would be acceptance of 2015 as the benchmark, as the beginning,
as the before.”
Factor Eight. The circuit court found that this factor—whether the expert
accounted for obvious alternative explanations—favored exclusion. The judge criticized
Ms. Cardell’s failure to provide calculations showing each individual doctor’s “inherent
ability to generate revenue over the time periods”—in case the jury found that not all
doctors left because of defendant’s alleged negligence.
15
Ms. Cardell calculated lost profits based on the exodus of members from the practice
as a whole instead of calculating the lost profits attributed to each individual member
leaving. Ms. Cardell readily acknowledged that her calculations were based on what profits
would have been had none of the members left PNSI. The circuit court opined that if the
jury found—for example—that only four of the seven members left because of Appellees’
actions, then Appellees should only be liable for lost profits associated with those four
members leaving, not all seven. Based upon this hypothetical, the circuit court expressed
doubt about the usefulness of Ms. Cardell’s testimony to the jury.
The circuit court also found fault―under factor eight―with Ms. Cardell’s failure
to opine on whether insurance reimbursement rates affected lost profits. Insurance
reimbursement rates are the amount that PNSI—or its members—receive from an
insurance company for services it rendered. These reimbursement rates may differ between
Medicare/Medicaid and vary based on federal legislation passed. Ms. Cardell explained
that she did not account for changes in reimbursement rates because, even though they may
have declined slightly, access to healthcare increased. Such increased access, she said,
would offset any declines in reimbursement rates.
Factor Nine. The circuit court determined that this factor did not apply—or
seemingly favored inclusion of Ms. Cardell’s testimony—because the court had “no reason
to think that she blew [her calculations and testimony] off as an inconsequential project”
and found that “she took this very seriously.”
Factor Ten. In the trial judge’s mind, “whether the field of expertise claimed by
the expert is known to reach reliable results for the type of opinion the expert would
16
give”—favored exclusion because “the mere fact the [calculations] changed in June of
[2021] for fully subjective reasons” and “had nothing to do with any new information”
made “the whole reliability even that much more suspect.”
Considering these ten factors, the circuit court granted Appellees’ motion to exclude
Ms. Cardell’s testimony and motion to strike PNSI’s lost profits claim. Appellees moved
for summary judgment on the remaining counts, which the court granted.6 This timely
appeal followed.
DISCUSSION
“[T]he Daubert hearing’s purpose is only to determine the admissibility of expert
evidence; it is not to determine ‘whether such evidence is sufficient with respect to a matter
upon which the plaintiff has the burden of proof.’” Gannon v. U.S., 571 F. Supp. 2d 615,
621 (E.D. Pa. 2007) (citation omitted). “[T]he admissibility of expert testimony is a matter
largely within the discretion of the trial court, and its action in admitting or excluding such
testimony will seldom constitute ground for reversal.” Rochkind, 471 Md. at 10 (quoting
Roy v. Dackman, 445 Md. 23, 38–39 (2015)). We review exclusion of an expert’s
testimony for abuse of discretion. Rochkind, 471 Md. at 10–11 (citing Blackwell v. Wyeth,
408 Md. 575, 618 (2009)). “Such a ruling, however, may be reversed on appeal if it is
founded on an error of law or some serious mistake, or if the trial court clearly abused its
discretion.” Id. at 11 (quoting Sippio v. State, 350 Md. 633, 648 (1998)). As the Court of
6
PNSI stipulated to the dismissal of its unjust enrichment claim. Appellees moved for
summary judgment on the counts of accountant malpractice, negligent misrepresentation,
and breach of contract.
17
Appeals recently said, “The standard of appellate review for Frye-Reed determinations is
de novo.” Frankel v. Deane, No. 43, Sept. Term 2021, __ Md. __, slip op. at 17 (filed Aug.
25, 2022); see also Williams v. State, 251 Md. App. 523, 546 (2021) (citations omitted)
(“[E]ven with respect to a discretionary matter, a trial court must exercise its discretion in
accordance with correct legal standards.”), aff’d, 478 Md. 99 (2022); In re Guardianship
of Dory, 244 Md. App. 177, 203 (2019) (quoting Barrett v. Barrett, 240 Md. App. 581, 591
(2019)) (holding that the circuit court’s failure to consider the proper legal standard in
reaching its decision was an abuse of discretion).
PNSI asserts that the circuit court erred and/or abused its discretion in excluding
Ms. Cardell’s lost profits testimony. It avers that the errors occurred in (1) finding Ms.
Cardell unqualified to render an opinion regarding lost profits of its medical practice, (2)
finding Ms. Cardell’s selection of the 2015 base year unreliable, (3) and assessing the
soundness of Ms. Cardell’s data and assumptions as impacting admissibility rather than
weight. We will address each of these assertions in turn.
Ms. Cardell’s qualifications to testify as an expert in this case
The circuit court found that Ms. Cardell “has the capacity to be an expert in some
matters,” but not in this matter. Although Ms. Cardell has experience calculating lost
profits in various industries, the circuit court said, PNSI is “a medical practice that has
alternate streams of revenue that have alternate considerations when trying to determine
expenses and things of that nature. And there was nothing about [Ms. Cardell’s]
background that showed that she had any special exposure to this.” Based on her
testimony, Ms. Cardell could recall conducting a prior lost profits calculation for only one
18
medical practice. The circuit court stated it did not know “what qualifie[d]” Ms. Cardell
to make judgments regarding this “fairly specialized LLC or type of work.”
Appellant asserts that the circuit court erred in considering Ms. Cardell’s experience
with medical practices at the admissibility stage. Admissibility of expert testimony is often
broken down into three factors: (1) whether the expert, based on her skills, knowledge,
experience, and training, is qualified; (2) whether her methods are reliable; and (3) whether
there is a sufficient factual basis to support her testimony and assist the trier of fact. See,
e.g., Md. Rule 5-702; Moore v. Intuitive Surgical, Inc., 995 F.3d 839, 850–51 (11th Cir.
2021); Orbital Eng’g, Inc. v. Buchko, 578 F. Supp. 3d 727, 731 (W.D. Pa. 2022).
The circuit court did not challenge Ms. Cardell’s qualifications as a CPA or her
experience evaluating businesses and their profits. Yet the court decided that a medical
practice like PNSI was so different from other small businesses that a CPA must possess
specialized training or experience before qualifying to testify as to its lost profits. This
conclusion is at odds with decisions applying Daubert. See Maiz v. Virani, 253 F.3d 641,
665 (11th Cir. 2001) (holding that the expert economist’s lack of experience in real estate
development goes “more towards the foundation” of the witness’s testimony than his
qualifications to calculate damages). We agree with the rationale of the Eleventh Circuit
and believe it applies equally to a CPA testifying about lost profits. See also Moore, 995
F.3d at 853 (holding that, in a products liability action, the expert surgeon’s inexperience
with particular surgical tools goes only to reliability and not his qualification to testify as
to causation); Pulse Med. Instruments, Inc. v. Drug Impairment Detection Servs., LLC, 858
19
F. Supp. 2d 505, 512 (D. Md. 2012) (holding that any issues with the expert’s qualifications
in relation to an opposing expert’s testimony may be explored on cross examination).
“[I]t is an abuse of discretion to exclude testimony simply because the trial court
does not deem the proposed expert to be the best qualified or because the proposed expert
does not have the specialization that the court considers most appropriate.” Holbrook v.
Lykes Bros. S.S. Co., Inc., 80 F.3d 777, 782 (3d Cir. 1996) (citation omitted). “If the expert
meets liberal minimum qualifications, then the level of the expert’s expertise goes to
credibility and weight, not admissibility.” Smolow v. Hafer, 513 F. Supp. 2d 418, 426
(E.D. Pa. 2007) (quoting Kannankeril v. Terminix Int’l, Inc., 128 F.3d 802, 809 (3d Cir.
1997)).
Appellees have not cited any decisions supporting the assertion that a trial court—
in its gatekeeper role under Daubert—acts properly in excluding the testimony of a
qualified CPA with significant lost profits expertise on grounds that the expert’s experience
with such analysis had only included one medical practice. We do not accept the premise
that knowledge of the accounting principles and tax laws required to analyze profits for a
limited liability company medical practice differs so markedly from that required for other
small businesses―especially “pass-through” entities like an LLC―that the proffered CPA
must demonstrate particularized experience in medical practice analysis. See, e.g.,
Smolow, 513 F. Supp. 2d at 425–26; Viterbo v. Dow Chem. Co., 826 F.2d 420, 422 (5th
Cir. 1987) (citing Dixon v. Int’l Harvester Co., 754 F.2d 573, 580 (5th Cir. 1985)) (“As a
general rule, questions relating to the bases and sources of an expert’s opinion affect the
weight to be assigned [to] that opinion rather than its admissibility and should be left for
20
the jury’s consideration.”). Here, we are dealing with generally accepted accounting
principles and tax law, not cutting-edge technical developments or scientific theories.7
Because the circuit court found Ms. Cardell unqualified to testify as an expert due to her
lack of medical industry experience, it imposed an unduly high standard. This was error.
A CPA with Ms. Cardell’s experience certainly has the mathematical and analytical skills
to take these specialties into account if she thought it necessary. Her lack of specialized
experience is ripe for cross-examination at trial.
The circuit court also took issue with the reliability of―what it considered― Ms.
Cardell’s methods. We next turn to those issues to determine if the circuit court had a
sustainable alternative ground for excluding the expert testimony.
Methodology employed
The circuit court decided that Ms. Cardell’s methodology was unreliable under the
Daubert-Rochkind standard. In its bench opinion, the circuit court expressed five
weaknesses it saw in Ms. Cardell’s analysis: (1) using 2015 as the base year; (2) failing to
consider changes in insurance reimbursement rates; (3) failing to articulate standards to
7
Generally accepted accounting principles (GAAP) are regularly used in the accounting
field and have been recognized in Maryland and other courts. See, e.g., Dabbs v. Anne
Arundel Cnty., 458 Md. 331, 360 (2018); Reiger v. Price Waterhouse Coopers LLP, 117
F. Supp. 2d 1003, 1009 (S.D. Cal. 2000) (“[GAAP] comprise a set of basic postulates and
broad accounting principles pertaining to business enterprises. These principles, approved
by the American Institute of Certified Public Accountants (‘AICPA’), establish guidelines
for measuring, recording and classifying the transactions of a business entity.”), aff’d sub
nom., DSAM Glob. Value Fund v. Altris Software, Inc., 288 F.3d 385 (9th Cir. 2002);
Marksman Partners, L.P. v. Chantal Pharm. Corp., 927 F. Supp. 1297, 1304 (C.D. Cal.
1996) (“[GAAP] are the conventions, rules, and procedures that constitute the professional
standards of the accounting profession.”).
21
define economic impact and treat member draws; (4) changing her calculations while the
underlying facts remained the same; and (5) failing to calculate lost profits for each
individual member leaving PNSI.8 Many of the circuit court’s qualms with Ms. Cardell’s
calculations overlap with one another, but we will address them separately in turn.
a. Selection of 2015 as the base year
The circuit court considered Ms. Cardell’s selection of 2015 as the base year for her
lost profits calculations to be speculative. It elaborated by stating “there wasn’t any reason
to believe that she had the training or the experience or the information to [select 2015 as
the base year], it just seems speculative to me.” In applying the Daubert factors, the court
noted that “there’s nothing [the circuit court had] been presented from which . . . the factors
that she used in selecting 2015 could be tested.”
“An expert opinion requires some explanation as to how the expert came to his
conclusion and what methodologies or evidence substantiate that conclusion.” Riegel v.
Medtronic, Inc., 451 F.3d 104, 127 (2d Cir. 2006) (citing Fed. R. Evid. 702). “Unless the
information or assumptions that plaintiff’s expert relied on were ‘so unrealistic and
8
Appellees, relying in part on this Court’s recent opinion in Tallant v. State, 254 Md. App.
665 (2022), assert that since PNSI did not fully address the issues of reimbursement rates
and treatment of member draws in its initial brief, PNSI waived any challenge to the circuit
court’s findings on those issues. We disagree. In Tallant, we concluded that Appellant
lacked in his initial brief and reply brief any support for his request for a different trial
judge or for the circuit court’s decision to close the courtroom during a proceeding. 254
Md. App. at 689–90. Here, PNSI adequately briefed and proposed legal arguments on the
circuit court’s alleged errors and abuses of discretion in determining the reliability of Ms.
Cardell’s methodology in its initial brief. Additionally, unlike in Tallant, PNSI specifically
addressed sub-issues of reliability regarding member draws and reimbursement rates in its
reply brief. Therefore, we do not agree that PNSI waived any arguments related to these
specific reliability sub-issues.
22
contradictory as to suggest bad faith,’ inaccuracies in the underlying assumptions or facts
do not generally render an expert’s testimony inadmissible.” Washington v. Kellwood Co.,
105 F. Supp. 3d 293, 306 (S.D.N.Y. 2015) (cleaned up) (quoting R.F.M.A.S., Inc. v. So,
748 F. Supp. 2d 244, 269 (S.D.N.Y. 2010)).
Here, the circuit court heavily relied on CDW LLC v. NETech Corp., 906 F. Supp.
2d 815 (S.D. Ind. 2012) to support excluding Ms. Cardell’s testimony for selecting 2015
as the base year for her lost profit calculations. Careful examination of that case reveals
important distinctions that demonstrate that this reliance was misplaced. CDW LLC’s
expert asserted that “but for NETech’s alleged wrongful conduct,” its Indianapolis office
would have grown in revenue at the same mean rates experienced by the other CDW
branches in the Great Lakes region. CDW LLC, 906 F. Supp. 2d at 823. CDW’s expert
used the “yardstick” approach for calculating lost profits for the Indianapolis branch. Id.
at 824. In using this approach, the expert took the average revenue growth of the other
CDW Great Lakes branches to project what the profits of the Indianapolis office should
have been—but for defendant’s conduct. See id. The expert did not compare the
Indianapolis branch to its own previous growth rates or “the actual experience of any other
business entity.” Id. The CDW LLC court took issue with this because each branch showed
“wide variations in branch performance from year to year” and the expert “made no (and
did not rely on any) economic analysis of the Indianapolis market or any other market.”
Id.
The CDW LLC court noted that the “expert’s choice in data sampling”—the
sufficiency of the data—"is at the heart of his methodology.” Id. Unlike CDW’s expert,
23
Ms. Cardell relied on PNSI’s accounting records, not records from another comparable
entity. She examined PNSI’s profits and losses from 2010 and onward and explained why
she chose 2015, and not previous years, as the base year for her calculations.
[THE COURT]: I mean isn’t there some understanding within
your profession that you have to use a hundred years or five
years or something [as the benchmark]? I mean, something
period, or is any expert free to pick…as short or as long a
period as they feel they want to?
[MS. CARDELL]: So what we are told is to, to pick a before
or a benchmark number that is going to be a prophecy for the
future. And that can be determined based on one year. That
can be determined based on an average if that’s applicable. But
if for example you have past years that aren’t going to be
representative of the future by including those in your before
period you are, you are not getting a reasonable picture of what
the earnings would have been.
Unlike the expert in CDW LLC, Ms. Cardell did not sample data from other markets;
she relied on PNSI’s own data to determine the benchmark. She provided an explanation
as to why 2015 was the appropriate base year, and unless the data and assumptions she
made were “so unrealistic and contradictory as to suggest bad faith,” her testimony should
be admissible. See Washington, 105 F. Supp. 3d at 306 (quoting R.F.M.A.S., Inc., 748 F.
Supp. 2d at 269). It is not so unrealistic or contradictory as to suggest bad faith when an
experienced CPA opines that a company reached a reasonably predictable level of profits
in a particular year after several years of enduring extra expenses during a growth period.
The court, acting as gatekeeper, acts outside of its role when it second guesses the expert’s
choice of data to rely on when applying the indisputably legitimate choice of
methodology―the before-and-after method. See Packgen v. Berry Plastics Corp., 46 F.
24Supp. 3d. 92, 111 (D. Me. 2014) (denying a motion to exclude testimony of a CPA, despite
projecting a 10 years’ lost profits period based on only one profitable year, opining that
“legal sufficiency of the evidence supporting a ten-year loss period” is not a Daubert issue);
Furmanite Am., Inc. v. T.D. Williamson, Inc., 506 F. Supp. 2d 1126, 1132 (M.D. Fla. 2007)
(citation omitted) (“Errors in an expert’s application of a reliable method go to the
credibility of an expert’s opinion rather than the opinion’s reliability under Daubert.”).
Therefore, the circuit court erred.
b. Other data and assumptions
Another prominent concern of the circuit court was Ms. Cardell’s failure to consider
alternatives for lost profits, such as change in insurance reimbursement rates. We agree
that an expert’s failure to consider alternative explanations can be grounds for excluding
her opinions. Wendler & Ezra, P.C. v. Am. Int’l Grp., Inc., 521 F.3d 790, 791 (7th Cir.
2008) (upholding the exclusion of an expert’s testimony for failing to disclose what
software and data he used and how alternative explanations were ruled out); Waytec Elecs.
Corp. v. Rohm and Haas Elec. Materials, LLC, 459 F. Supp. 2d 480, 489 (W.D. Va. 2006)
(citations omitted) (“[I]f an expert utterly fails to consider alternative causes or fails to offer
an explanation for why the proffered alternative cause was not the sole cause, a district
court is justified in excluding the expert’s testimony.”). But see Astra Aktiebolag v. Andrx
Pharms., Inc., 222 F. Supp. 2d 423, 488 (S.D.N.Y 2002) (citation omitted) (holding that
an expert need not “categorically exclude each and every possible alternative cause in order
to render the proffered testimony admissible”).
25
This case, however, is less about failure to consider alternatives for what caused lost
profits—since Ms. Cardell is not a causation expert—and more about alleged failure to
calculate lost profits properly, or at least calculate and present to the court all possible
variables. Ms. Cardell did not include in her calculations the possible changes in insurance
reimbursement rates for PNSI from 2016 to 2019. When presented with an unauthenticated
chart of reimbursement rates at the evidentiary hearing, Ms. Cardell noted that those
reimbursement rates were declining, but said that these decreases would be offset by the
market increase caused by more access in the general population to healthcare, which
would increase revenue overall.
Whether Ms. Cardell failed to consider reimbursement rates is not an issue with the
methodology—the before-and-after method. Rather, it is an issue with the soundness of
the data she used to reach her conclusion.9 The Seventh Circuit in Manpower, Inc. v. Ins.
Co. of Pa., 732 F.3d 796 (7th Cir. 2013), addressed a remarkably similar expert
admissibility issue. In Manpower, one party offered a forensic accounting expert, Mr.
Sullivan, to calculate lost profits. 732 F.3d at 801. Sullivan used the before-and-after
method to calculate lost profits. Id. at 803. The district court was concerned by Sullivan
choosing “such a short base period for calculating lost profits.” Id. at 802.
Sullivan chose a base period of five months—which he used to calculate the
projected revenue growth rate in the after period. See id. at 801–02. He used an estimated
9
Many of the issues overlap in this section. Analyzing reimbursement rates, selecting the
base year, and relying on data from and conversations with PNSI all are issues with the
soundness of the data.
26
growth rate of 7.76%—calculated by comparing the company’s revenues from January to
May 2006 (before the “collapse”) to the total revenues earned in the same five-month
period in 2005. Id. at 801. The district court thought that the growth rate calculated from
the chosen period was not representative of the company’s historical growth rate. Id. at
801–02.10
The expert reviewed the company’s financial data from 2003 forward and concluded
that the company turned a corner by the end of 2005. Id. at 802. In deciding to use January
to May 2006 as the base period, Mr. Sullivan relied on statements made by the company
managers. Id. Sullivan further noted that the growth rate during this period was a more
conservative estimate than if he had used a longer 12- or 14-month period which would
have yielded growth rates of 20.1% and 13.67%, respectively. Id. at 803.
Despite Sullivan’s growth rate extrapolation being “the simplest and most
frequently used revenue forecasting method,” the district court found his methods
unreliable and excluded his testimony. Id. at 802. The district court criticized Sullivan’s
reliance on conversations with the company managers, using such a short base period, and
failing to consider other indicators that may have impacted the growth rate—thus finding
that his calculations were based on assumptions that caused his calculations to be deemed
unreliable. Id. The Seventh Circuit reversed. Id. at 812. It concluded that Sullivan’s
expert opinion—“although not bulletproof—[was] sufficiently reliable to present to a jury”
10
The company’s average annual growth rate from 2003 to 2009 was negative 4.79% and
only 3.8% from January 2005 to May 2006. Manpower, Inc. v. Ins. Co. of Pa., 732 F.3d
796, 801–02 (2013).
27
and the district court abused its discretion by “exercis[ing] its gatekeeping role under
Daubert with too much vigor.” Id. at 805.
Although judges have much flexibility and leeway in determining reliability of
expert testimony, reliability—according to Manpower—“is primarily a question of the
validity of the methodology employed by an expert, not the quality of the data used in
applying the methodology or the conclusions produced.” Id. at 806.11 The Manpower
court relied on another Seventh Circuit decision, Smith v. Ford Motor Co., 215 F.3d 713(7th Cir. 2000), to explain the same concept: “The soundness of the factual underpinnings
of the expert’s analysis and the correctness of the expert’s conclusions based on that
analysis are factual matters to be determined by the trier of fact, or, where appropriate, on
summary judgment.” Manpower, 732 F.3d at 806 (quoting Smith, 215 F.3d at 718).
Similarly, the Maryland Rule 5-702 requirement that there is “a sufficient factual
basis” supporting the testimony does not justify a trial court’s exclusion of such testimony
based upon “[t]he soundness of the factual underpinnings of the expert’s analysis and the
correctness of the expert’s conclusions.” See Manpower, 732 F.3d at 806. The requirement
11
Our Court of Appeals recently cited Manpower in describing the gatekeeping function
under Rule 5-702. State v. Matthews, 479 Md. 278, 316 (2022) (“For these reasons, in
exercising its gatekeeping function under Rule 5-702, a trial court generally should be most
concerned about the reliability of an expert’s methodology. Once a trial court is satisfied
that an expert has applied a reliable methodology to an adequate supply of data, the court
should not exclude the expert’s testimony merely because the court is concerned that the
expert’s particular conclusions may be inaccurate. See Manpower, Inc. v. Ins. Co. of
Pennsylvania, 732 F.3d 796, 806 (7th Cir. 2013) . . . .”). In Matthews, the Court of Appeals
concluded that the trial court did not abuse its discretion in admitting the expert’s
testimony. Matthews, 479 Md. at 325.
28
outlined in Md. Rule 5-702 means that the “sufficient facts [must] underlie the expert’s
opinions that indicate the use of ‘reliable principles and methodology in support of the
expert’s conclusions’ so that the opinion constitutes more than mere speculation or
conjecture.” Exxon Mobil Corp. v. Ford, 433 Md. 426, 478–81 (2013) (quoting Giant
Food, Inc. v. Booker, 152 Md. App. 166, 182–83, (2003)) (upholding admission of
testimony on diminution in value of real property despite the expert appraiser having
ignored sales of nearby properties).
Ms. Cardell calculated lost profits using the company’s actual accounting data and
used a base period before the exodus of most members occurred. “[T]hese are the kinds of
data that accountants normally rely on in calculating future earnings [and lost profits].”
See Manpower, 732 F.3d at 809. Additionally, “[i]t may be true that using specific
variables”—such as insurance reimbursement rates—“would have resulted in a . . . more
accurate figure. However, . . . . whatever shortcomings existed in [the expert’s]
calculations [goes] to the weight, not the admissibility of the testimony.” See Cummings
v. Standard Reg. Co., 265 F.3d 56, 65 (1st Cir. 2001).
Because the circuit court excluded Ms. Cardell’s testimony―in part―based on
missing variables, the court misapplied the law and thus abused its discretion and usurped
the role of the jury. See Manpower, 732 F.3d at 806 (“[A] court usurps the role of the jury,
and therefore abuses its discretion, if it unduly scrutinizes the quality of the expert’s data
and conclusions rather than the reliability of the methodology the expert employed.”); Jack
B. Weinstein, Weinstein’s Federal Evidence 702.05[2][a] (2d ed. 1997) (“[A]nalytical
29
focus should be on principles and methodology. Trial courts may not reject expert
testimony simply because they disagree with the conclusions reached by the witness.”).
c. Treatment of member draws
The circuit court also criticized Ms. Cardell’s “lack of industry standards” for
treatment of the draws that each individual member takes from PNSI.12 Ms. Cardell noted
that the member draws are part of what accountants consider “guaranteed payments.”
[MS. CARDELL]: The guaranteed payments, in my review
are made of two things, the draws that the doctors receive
which are essentially salary. And then for some doctors it
includes the trauma and on call payments for revenues that they
earned working that.
Regardless of whether the owners elected to take a draw or if that money stayed in the
business, the money generated by medical services was still a profit to the business,
according to Ms. Cardell.
The circuit court suggested that the treatment of member draws is a “pretty basic
issue” and seems to be “capable of rearing its head in every case” that involves such owner
draws. We agree that such an issue may arise again, but that is because treatment of
member draws and classifying fixed and variable expenses are fact-laden endeavors. The
trial court seemed to recognize this at one point when—in response to defense counsel’s
cross-examination of Ms. Cardell on this point—it said:
12
The circuit court also found that Ms. Cardell cited no industry standards in defining the
term “economic impact.” Defining such a term does not impact the reliability of the
methodology Ms. Cardell employed. The issue here is PNSI’s lost profits. Whether
Cardell correctly used the broader concept of economic impact―which focuses on effects
upon other business and the relevant economy―is not material.
30
[Ms. Cardell’s] view is it doesn’t matter how much these
Plaintiffs took out, it doesn’t affect the profits. . . . [I]t may
have some legal effect at some point. [Your line of
questioning] may mean a lot to a jury, but I’m not really sure
where it fits into this hearing.
Yet in announcing its ruling, the trial court appeared to disagree with Ms. Cardell’s
conclusion about how a CPA, in calculating a business’s lost profits, should deal with
correlating reduced expenses. It also required Ms. Cardell to cite a specific accounting rule
governing these particular circumstances and implied that her own professional opinion
based on training, certification, and experience was insufficient. Ms. Cardell testified that
she had researched the accounting literature and determined that there was no established
rule on this issue. In this context, a court’s belief that an experienced CPA’s judgment call
based on accounting principles is not sufficient and that there should be an explicit, citable
accounting rule, has no place in a Daubert-Rochkind ruling.
The Eastern District of Missouri addressed such an issue in the context of a Daubert
hearing. See OCI Chem. Corp. v. Am. Railcar Ind., Inc., No. 4:05CV1506FRB, 2009 WL
890525, at *1 (E.D. Mo. Mar. 30, 2009).13 In OCI Chem., the defendant sought to exclude
13
The Court of Special Appeals allows the citation of unreported opinions from federal
courts and courts of other states as long as the jurisdiction where it was issued would allow
its citation for persuasive value in its courts. Gambrill v. Bd. of Ed. Of Dorchester Cnty.,
252 Md. App. 342, 352 n.6 (2021), rev’d on other grounds, No. 34, Sept. Term 2021, __
Md. __ (2022) (filed Aug. 26, 2022); CX Reinsurance Co. Ltd. v. Johnson, 252 Md. App.
393, 414 n.7 (2021), rev’d on other grounds, No. 47, Sept. Term 2021, __ Md. __ (2022)
(filed Aug. 29, 2022). The Eastern District of Missouri permits citation and reliance on its
unpublished opinions under certain circumstances. See Federal Trade Commission v.
Neiswonger, No. 4:96CV2225SNLJ, 2008 WL 11434564, at *1 n.3 (E.D. Mo. Oct. 16,
2008) (“Although it is not the Court’s usual practice to cite unpublished opinion, it does so
in circumstances wherein the unpublished opinion offers legal guidance to the Court in
31
plaintiff’s lost profits expert—Kenneth Giambagno—under Daubert because the defendant
asserted Mr. Giambagno “failed to deduct all applicable expenses.” Id. at *2.
In general, in calculating lost profits damages, lost revenue is
estimated, and overhead expenses tied to the production of that
income are deducted from the estimated lost revenue.
Overhead expenses include both fixed and variable expenses.
Fixed expenses are the continuous expenses of the business
that are incurred regardless of the loss of a portion of the
business, for example rent, taxes, and administrative salaries.
Variables expenses, also called direct expenses, are costs
directly linked to the volume of business.
Id. at *3 (quoting Ameristar Jet Charter, Inc. v. Dodson Int’l Parts, Inc., 155 S.W.3d 50,
55 (Mo. 2005) (en banc)).
OCI Chem. held that whether expenses are fixed or variable is a factual issue to be
determined on a case-by-case basis. See 2009 WL 890525, at *3. The defendant disagreed
with some of Mr. Giambagno’s determinations on what costs he treated as variable
expenses. Id. at *4. Because the treatment of expenses is a factual issue, it goes to the
credibility of the witness and “such [a] dispute may be brought out at trial by the defendant
through cross-examination and the presentation of contrary evidence.” Id.
Just like in OCI Chem., Ms. Cardell used an approved methodology—the before-
and-after method. She relied on the actual records maintained by PNSI for the period in
question, which enhances reliability. Whether Ms. Cardell should have deducted the
reaching a determination on the issue(s) at hand.”); Burke v. Univar USA, Inc., 354 F. Supp.
2d 1047, 1051 n.4 (E.D. Mo. 2005) (“Although it is not the Court’s customary practice to
cite to unpublished opinions, it does so only in those instances wherein the unpublished
opinion(s) addresses a significant issue before the Court and contributes to the Court’s
decision in a meaningful way.”). We address OCI Chem. for those reasons.
32
member draws from the projected profits is something the Appellees can attack during
cross-examination before a jury—but not at the Daubert-Rochkind hearing. Like the
Eastern District of Missouri, we consider this to be a fact-laden issue—involving
credibility, not reliability. See id. at *2. As such, under Daubert-Rochkind, the court’s
criticism was misplaced.14 See Acker v. Burlington N. and Santa Fe Ry. Co., 347 F. Supp.
2d 1025, 1031 (D. Kan. 2004) (“Although [the expert] does not distinguish hard expenses
from lost profits, the court fails to see how this makes his testimony unreliable.”).
d. Correction of calculations
The circuit court found Ms. Cardell’s testimony to be unreliable under the third
Daubert factor—a “known or potential rate of error.” The court decided Ms. Cardell’s
calculations had a known or potential rate of error because she corrected her calculations.15
After reviewing her work in preparation for her deposition, Ms. Cardell made a
“normalizing adjustment” to her calculations that lowered lost profits, thus reducing the
plaintiffs’ claim. The underlying data did not change―instead she merely corrected a
mistake in her calculations. The circuit court determined that because Ms. Cardell changed
her calculations when the underlying facts remained the same, her calculations had a high
rate of error.
14
We are not deciding that a trial court would be barred from ruling against a plaintiff on
grounds that damages had not been proven with sufficient certainty to go to a jury on a
motion under Maryland Rule 2-519 or 2-532.
15
First, Ms. Cardell updated her calculations to restrict the period of lost profits through
December 31, 2019, because the COVID-19 pandemic would have affected profits from
2020 onward. The circuit court did not take issue with this change.
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In doing so, the circuit court misinterpreted the third prong of Daubert. The error
rate that Daubert speaks of is the rate of unknown errors in the methodology employed,
not an “error correction rate.” Crowley v. Chait, 322 F. Supp. 2d 530, 540 (D.N.J. 2004)
(emphasis in original).
Daubert does not require that an expert’s testimony be
excluded simply because [she] admitted and corrected [her]
own mistakes or retracted [her] false statements. In fact, one
of the very purposes of a Daubert hearing . . . is to give experts
a chance to explain and even correct errors that they made in
their reports. . . . There is no stigma attached to such error
correction, nor should there be. If anything, it strengthens the
quality of the expert report. The known or potential rate of
error discussed in the third prong of Daubert more likely refers
to the rate at which unknowable mistakes that cannot be
corrected have been made in a data or statistical set; the known
or potential rate of error then serves as an indication of how
reliable or unreliable that data may be.
Id.; see also Moe v. Grinnell Coll., 547 F. Supp. 3d 841, 850 (S.D. Iowa 2021) (analyzing
the known or potential rate of error rate of the techniques and methods used); Janopoulos
v. Harvey L. Walner & Assocs., Ltd., 866 F. Supp. 1086, 1097 (N.D. Ill. 1994) (holding
that the expert satisfied the Daubert standard even though he may not have known “the
known or potential rate of error” because the expert’s methods were generally accepted).
We agree with these cases. Any other rule would be a disincentive to disclose and explain
errors.
The circuit court found a high rate of error even though Ms. Cardell employed a
generally accepted methodology in this case and relied on accounting data from PNSI itself
when conducting her lost profits calculation. This was an error in applying the Daubert-
Rochkind standard.
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e. Failure to calculate lost profits attributed to each individual member of PNSI
The circuit court took issue with Ms. Cardell calculating lost profits because of all
seven doctors leaving, without also calculating profits lost with respect to each individual
doctor leaving.
[THE COURT]: Well let me cut to what’s interesting to me.
Let’s say you testified Plaintiff’s 2, your schedules go into
evidence. Your testimony goes swell, it mirrors what you did
today, nothing new. And then the jury comes back and finds
that three of the seven doctors left for reasons totally unrelated
to the Defendants while four of the seven left for reasons
caused by the Defendants?
What good is your testimony . . . [to] the jury in terms
of trying to figure out what that lost profit is? Because it
wouldn’t be fair to make the Defendants pay for all seven since
they only drove out three, or they only drove out four under my
hypothetical. How do you take into account that maybe all
seven didn’t leave because of the Defendants?
The circuit court brought up similar issues with causation and PNSI’s damages
theory throughout the Daubert-Rochkind hearing. For example, the circuit court asked Ms.
Cardell, “can you say from your examination of the records that the only reason for the
reduction [in lost profits] is the doctor leaving as opposed to other sources such as the
reimbursement rate from the insurance company declining?” Ms. Cardell emphasized that
she was not a causation expert in this case and did not have an opinion on causation. She
further explained that she “looked at the practice wholistically. So not on a doctor-by-
doctor basis.”
“The purpose of a Daubert hearing is to filter out expert evidence based upon
unreliable expert evidence.” Lenawee Cnty. v. Wagley, 836 N.W.2d 193, 208 (Mich. Ct.
App. 2013).
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A Daubert-type hearing . . . is not a judicial search for truth. .
. . The inquiry is not into whether an expert’s opinion is
necessarily correct or universally accepted. The inquiry is into
whether the opinion is rationally derived from a sound
foundation.
Id. at 208–09 (emphasis in original) (quoting Chapin v. A & L Parts, Inc., 732 N.W.2d 578,
587 (Mich. Ct. App. 2007)); see also Gannon, 571 F. Supp. 2d at 621. “Thus, the question
here is not whether damages for lost profits are proper, but whether the amount of lost
profits to which [Ms. Cardell] contends [PNSI] is entitled is founded on a judicially-
recognized methodology.” See Natchez Reg’l Med. Ctr. v. Quorum Health Res., LLC, 879
F. Supp. 2d 556, 579 (S.D. Miss. 2012) (stating that the before-and-after and yardstick
methodologies are reliable).
The circuit court—by looking to causation of lost profits—circumvented the
purpose of a Daubert hearing. The purpose—in this case—is to determine whether Ms.
Cardell used reliable methodology in coming to her conclusion—not whether PNSI met its
burden of proof on whether Appellees’ conduct caused its lost profits. See, e.g., Gannon,
571 F. Supp. 2d at 621; Natchez Reg’l, 879 F. Supp. 2d at 579. The circuit court can hear
causal evidence and decide later whether there is sufficient evidence of a causal connection
to submit to the jury. See Jacobs v. Flynn, 131 Md. App. 342, 355 (2000) (citing Hughes
v. Carter, 236 Md. 484, 486 (1964)). The circuit court will be able to rule on such causation
issues through a Rule 2-519, 2-532, or other motion. And Ms. Cardell’s failure to compute
the lost profits on a per-doctor basis falls decidedly within the realm of cross-examination
or refutation by opposing expert. The circuit court therefore erred in finding Ms. Cardell’s
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testimony unreliable because she did not calculate lost profits for each individual member
leaving.
Analytical Gap
Considering the Court of Appeals’ recent Daubert-Rochkind opinion in State v.
Matthews, 479 Md. 278 (2022), Appellees ask us to find that—even if Ms. Cardell’s
methodology is reliable and there is an adequate supply of data—her calculations are full
of “analytical gaps,” and therefore her testimony should still be excluded. Appellees assert
that Ms. Cardell using 2015 as the base year, failing to account for changes in
reimbursement rates, and failing to articulate a standard for treatment of member draws
constitute analytical gaps. We do not agree.
“An ‘analytical gap’ typically occurs as a result of ‘the failure by the expert witness
to bridge the gap between his or her opinion and the empirical foundation on which the
opinion was derived.’” Matthews, 479 Md. at 316 (quoting Savage v. State, 455 Md. 138,
163 (2017)). The Matthews court used the expert testimony in Savage as an example of an
analytical gap because the defense expert failed to “connect the dots between the results of
the psychological tests he had administered on the defendant and his opinion that the
defendant was more likely to have greater difficulty controlling his reactions under
conditions of chaos and stress.” Id. at 318 (internal quotations omitted) (citing Savage,
455 Md. at 164).
In Savage, a trial court barred a neuropsychologist expert from testifying that the
defendant—due to a brain injury resulting from previous gunshot wounds to the head—
was “untrusting” and “hyper-vigilant to possible threats.” 455 Md. at 164. The expert used
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a reliable methodology—the Personality Assessment Inventory (“PAI”) test—but there
was an “analytical gap” between the PAI test and the expert’s conclusions that the
defendant “tends to view the world in untrusting terms.” Id. at 160–171. The PAI test has
been a reliable clinical tool used to determine “diagnosis, symptom severity, level of risk,
and treatment planning,” as well as being used to “assess factors salient to psycholegal
decision making.” Id. at 167 (quoting Tatiana M. Matlasz et al., Cognitive status and
profile validity on the Personality Assessment Inventory (PAI) in offenders with serious
mental illness, 50 Int’l J.L. & Psychiatry 38, 38–41 (2017)).
The Savage court held that use of the PAI test required application of a rigorous and
complex protocol, and the expert failed to provide evidence or explanation as to how he
reached the conclusion about the defendant using the PAI test. 455 Md. at 169. In this
case, to reach her opinion about lost profits based on the before-and-after method, Ms.
Cardell faced a far simpler task―without so many complex analytical steps. Ms. Cardell
relied on PNSI’s own accounting data and explained why she picked 2015 for the base
year. First, this reflected the timing of the doctors’ exodus. Second, 2015—according to
Ms. Cardell—was the most accurate reflection of the LLC’s predictable profits because the
company had achieved that profitable year after several years of growth. The before-and-
after method utilized by Ms. Cardell is clearly connected to the conclusion she reached,
not simply based on the ipse dixit of the expert. See Gen. Elec. Co. v. Joiner, 522 U.S.
136, 146 (1997) (“[N]othing in . . . Daubert . . . requires a . . . court to admit opinion
evidence that is connected to existing data only by the ipse dixit of the expert.”).
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Issues with the base year, insurance reimbursement rates, and treatment of member
draws are not “analytical gaps” between the methodology and the conclusion reached.
Rather, they are issues with the actual conclusion reached—a dollar amount measuring lost
profits. As explained above, such issues go to weight and credibility of Ms. Cardell’s
testimony. See Cummings, 265 F.3d at 65. Appellees may utilize all the advantages of the
adversarial process to challenge Ms. Cardell’s lost profit calculation, but—based on the
record before us—her testimony should not have been excluded on grounds that her
testimony is unreliable, filled with analytical gaps, or would not assist the trier of fact.
CONCLUSION
The circuit erred in holding that Ms. Cardell was unqualified to testify regarding
lost profits due to her lack of experience in a particular industry. The circuit court also
erred when it determined that Ms. Cardell’s calculations were unreliable because she used
2015 as the base year, failed to consider insurance reimbursement rates, included member
draws in PNSI’s profits, corrected a mistake in her calculations, and calculated lost profits
of PNSI arising from all the doctors departing, rather than each member individually. Not
one of these issues, however, affects the reliability of Ms. Cardell’s testimony under
Daubert and Rochkind.
The circuit court was troubled with Ms. Cardell’s opinion on an accounting issue
and whether PNSI could prove that Appellees caused all of PNSI’s members to leave. As
to the latter issue, Ms. Cardell disclaimed any role as to causation. Excluding Ms. Cardell’s
testimony on either of these grounds usurps the role of the jury. See Manpower, 732 F.3d
at 806. When a trial court usurps the role of the jury, it makes an error of evidentiary law
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and abuses its discretion. Id.; Moore, 995 F.3d at 852–53. We reverse the circuit court’s
decisions excluding Ms. Cardell’s testimony, striking the lost profits claim, and granting
summary judgment.
JUDGMENT OF THE CIRCUIT COURT
FOR HOWARD COUNTY REVERSED.
REMANDED FOR FURTHER
PROCEEDINGS CONSISTENT WITH
THIS OPINION. COSTS TO BE PAID
BY APPELLEES.
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