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Tips for Using an Expert Witness

The pre-planning for any litigation or bankruptcy filing should include a decision on whether an expert witness is needed. This decision should be made as early as possible, since an expert can add value in the initial stages of a reorganization. Practitioners and litigators can maximize the value of their expert witnesses at the following key points:

  • during the discovery and pre-trial/pre-filing phases;
  • in scheduling and calendaring, as timing is very important in bankruptcies;
  • during document review, e-discovery and claims organization phases; and
  • in drafting reports and in preparing a bankruptcy plan.

Establishing a strategic plan at the outset of any expert engagement is essential. Such strategizing typically includes determining the possible causes of harm or damages, and the best valuation and damages approaches to help a client’s case, including disposition, monetization and securitization.

Extracting Value from Experts in Pre-Trial or Pre-Filing Phases

It is never too early to consult with an expert. In a recent litigation matter, we were asked if we could serve as the expert regarding the quantification of damages. The associate who was handling the case for a senior partner explained that the case had already gone through discovery and mediation, and that the commencement of the trial would likely occur shortly thereafter. We inquired as to whether there was any more discovery that was possible in the case; we were told “no” and that it was formally closed.

The associate on the case then presented us with the conclusions that they had reached and a series of assumptions relied upon to derive those conclusions. The associate asked if we would be comfortable testifying to those conclusions should the case go to trial. Upon review of the case’s discovery and depositions, we raised a number of questions and asked the associates whether they had been addressed. Unfortunately, as it turned out, these questions had not been considered.

After providing a series of questions to the lawyers on the case, we presented our view of what the other side might be preparing in terms of its damages analysis. They were surprised at the potential liability exposure for their client should they lose the case. Up to this point, we had been retained only as consulting experts and we had not yet agreed to serve as testifying experts. Given the questions and concerns that we had raised, we elected not to proceed with the case as testifying experts.

Had we, or another expert, been involved earlier in the process, the outcome would have likely been very different. Certainly, the client would have been much better prepared for the mediation and the subsequent trial that did in fact take place.

In a bankruptcy setting, an expert can be valuable prior to the filing. Instead of determining possible damages, an expert can determine all intangibles that would come under a company’s portfolio of intellectual property (IP) assets; we call this “asset bundling.” For instance, prior to filing, a valuation expert can determine what assets have value and what those values might be. By understanding the value of assets in bankruptcy, a company can optimize its disposition strategy.

In addition, prior to a filing, if a company has a true assessment of the value of all of its assets, both tangible and intangible, other options might be considered. The debtor might (1) choose to file for chapter 11 rather than chapter 7, (2) file with a pre-packaged disposition plan in place or (3) decide to negotiate with their financial creditors for a workout plan without filing for bankruptcy. By having an expert provide a valuation prior to the filing, the debtor will have greater control during the bankruptcy proceedings.

Reasons to Involve the Expert Witness

The reasons to hire or consult with an expert in the initial stages of a bankruptcy or litigation include the following:

For bankruptcy:

  • to determine the portfolio of intangible assets/IP;
  • to determine whether the IP will maintain its value in a bankruptcy;
  • to value these assets in a liquidation scenario;
  • to determine the licensing portfolio, and whether they are saleable or not;
  • to help determine the best plan for the debtor (liquidation,
  • reorganization, pre-packaged plan, workout plan, etc.);
  • to determine the amount of the liquidation discount when a patent, trademark, copyright or software license is sold; and,
  • to assist with the marketing and sales process of assets.

For litigation:

  • to evaluate the overall business/issues and determine whether it should even be brought forward;
  • to educate the legal team on the technical issues of the case;
  • to determine what the best negotiating position
  • should be if litigation is found to be a poor alternative

or if the expert finds weaknesses in the case;

  • to test for damages potential;
  • to conduct analyses to prove or disprove critical points;
  • to assist the lawyers in developing key points;
  • to help uncover critical research that could prove important points;
  • to estimate in the early stages of the case, and then to more precisely calculate the amount of damages as the case progresses;
  • to craft and expand discovery requests;
  • to develop outlines for deposition questions for opposing witnesses; and,
  • to be part of the integrated legal team as the case moves from its early pre-trial stages through to a successful outcome.
  • In our experience, it will seldom cost more to engage an expert early in the proceeding than it will to wait and hire the expert just before discovery closes or the trial is ready to commence. Regardless of when the expert is retained, a significant amount of due diligence is required to prepare. By retaining the expert early in the process, the parties can work together to develop an efficient strategy. Sometimes, if the expert is engaged too late, time to prepare is compromised as the expert is playing catch-up on developing strategies, theories and damages analyses, as opposed to having had the time to be able to address the needs of the case in advance. Especially in bankruptcy proceedings, the knowledge that comes with valuations is essential when having to deal with creditors’ committees (ad hoc, secured and unsecured) and potential buyers. Representing the creditor’s side, it is beneficial to retain an expert early in the process to obtain a true assessment of what your clients might reasonably receive upon disposition. Experts Influence the Possible Outcome of Every Case

In litigation matters, there are four possible outcomes:

(1) settlement, (2) summary judgment, (3) verdict and (4) dismissal. A qualified expert can increase the odds of success in all four of these outcomes. While less than half of all cases go to a verdict, the expert can substantially influence the verdict. Experts can influence the odds at the pre-trial stages, the stage of various motions, the deposition stage, the report stage, the mediation stage, the predeposition stage, during discovery and crafting of motions, and during the crafting of pleadings. If the expert is working for the defendant, he/she can increase the chances of having the case dismissed, settling in mediation or limiting exposure in a final verdict. If the expert is working with the plaintiff, he/she can modify the outcome by helping to ensure that the odds of a summary judgment are higher, that the settlement is fair, or that the successful outcome and award represent actual damages. During bankruptcies, debtors will continue to proceed with some of the litigation that commenced prior to the filing. By having a true understanding of the value of their assets, debtors will be better positioned in any settlement negotiations. Case Study: Motions, Injunctions and Mediations As cases progress, there is often substantial motion practice — preliminary injunctions, summary-judgment motions, motions to extend, motions to post bonds, motions to increase bonds, motions to dismiss, etc. The expert can help during the pre-trial stages with research reports, statistical analyses, discovery requests, document review, etc. Our firm was retained by the defendants in the preliminary stages of Masters Software Inc. v. Discovery Communications Inc., et al.1 The litigation involved the popular cable TV program “Cake Boss” as defendants against Masters Software Inc., a manufacturing company with a product called “Cake Boss” software. The Master Software “Cake Boss” product was intended for bakeries and had been using the “Cake Boss” name and trademark longer than the highly successful cable TV program. Master Software brought an action to stop Discovery Communications from broadcasting the TV show. They were successful in getting the judge to grant a motion to have the TV program, “Cake Boss,” change its name at the end of its then-current third season of production.

The judge granted the motion and the injunction and ordered Masters Software to post a bond of $10,000, which, in the judge’s opinion, was a sufficient amount to cover the cost of “Cake Boss” the TV show to change its name. Discovery Communications challenged the injunction, arguing the amount of the bond was insufficient, and asked that the injunction be dropped and that the bond be raised by a substantial amount. At that point, we were hired as experts to analyze the cost of changing the “Cake Boss” TV show name, logo, graphics, etc., in the current market.

1 No. C10-405RAJ, U.S. District Court for the Western District of Washington.

[I]n the context of bankruptcy, the right valuation expert can identify all intangible asset and IP bundles to provide a

This is a complex situation, as changing the name of the TV program would not only have been ordered going forward, but also on a retroactive basis. In other words, “Cake Boss” would have been required to go back and take the first three years of its TV program out of syndication and change the name and titles on those episodes, as well as reshoot the film titles and the beginning and endings of all of the programs. All of the DVDs that were sold would have to have been recalled, as would all of the “Cake Boss” merchandise that had been sold, including aprons, books and mugs. As a consequence, the various elements that we needed to analyze included the costs for (1) cable TV production, (2) film-editing production, (3) merchandise production, (4) merchandise recall instruction, (5) Internet production, (6) social media production, (7) cable TV advertising, (8) Internet advertising and (9) social media advertising.

In addition, we needed to value the rebranding effort and identify the consumer market on TV, the Internet, cable and social media. The consumer market would need to be re-educated as to the new name, and advertising campaigns would need to be mounted to correct the false impression that the “Cake Boss” software was infringing, and to inform the public of the new name. We also calculated the cost that would be necessary to convert all of the social media postings from “Cake Boss” to a new name. The result was a calculated total cost of more than $5 million for changing the “Cake Boss” TV program name and informing the public.

In a most unusual ruling, the judge came forward with his opinion on both the filings by the lawyers on the injunction and his opinion on our report.2 The judge stated:

Discovery’s best evidence comes not from its motion to stay … but from its not-yet-ripe motion to modify the bond associated with the injunction. There, Discovery offers the report of an analyst on the likely cost of rebranding “Cake Boss.” Report of W. Anson. He opines that it will cost Discovery millions of dollars to rebrand the program, and that the vast majority of that expense will come not from modifying the television show or associated products, but from marketing the retitled program. Masters has had no chance to respond to that report, and the court makes no findings based on it. The report does, however, provide the first evidence supporting a notion that no one is likely to dispute: it will be expensive for Discovery to retitle “Cake Boss.”

By being available in the pre-trial stages, we were able to assist a client in extending the period of time that its TV show was allowed to continue using the “Cake Boss” name, and, more importantly, we enabled the client to reach a successful mediated conclusion with the plaintiff in the case — on terms with which the client was content. The key is to hire your experts early and use them to the maximum advantage possible.

Bankruptcy Case Study: Retail Clothing Store Liquidation

Our firm was also retained to determine the value of a well-known national retail clothing store for liquidation and sale. Part of the components that we valued included operating software, source codes, trademarks, mailing lists, online store and mail-order systems. Although each bankruptcy is different, there is a basic four-step process that we used in this matter that we normally employ when valuing and disposing of IP and intangible assets:

  • the audit and identification process, during which all IP, IT and other salable intangibles are identified;
  • the placing of market values on the assets, and the triage of those assets for both saleability and merchantability;
  • the development of a marketing and sales plan, demonstrating the assets when necessary (e.g., IT and operating systems), and advertising and targeting the market via traditional and electronic media; and
  • the negotiation, sale and disposal phase.

We performed valuation analysis of the company’s intangible assets and IP and helped them determine that liquidation was in fact its best option. By being retained at the beginning of the filing, we were then able to follow through and assist the company through the final disposition. All parties, including the creditors, were satisfied with the end result.

Closing Thoughts

To paraphrase Steven Fried, “My favorite flawed question is ‘How many times have you testified at trial?’” I agree with his answer, “Look, I have handled a great number of cases over my 25 years in the IP business, and of those … cases, very few have ever gone to trial. And almost all have settled in my clients’ favor, either after submitting my report or almost certainly after the other side has heard my deposition. The few that haven’t settled have almost universally then gone on to a verdict in my clients’ favor.”3

The point here is that picking the right expert, but not necessarily the one that has gone to court most often, can help your case a great deal. No expert can turn a case that does not have merit into a winner, but the right expert can highlight the strong parts of a good case with enough credibility and skill to raise the probability of a favorable settlement.

Similarly, in the context of bankruptcy, the right valuation expert can identify all intangible asset and IP bundles to provide a valuation. By highlighting the valuable parts of a company, the debtor strengthens its position in bankruptcy.

Finally, remember that communication is a two-way street. Help the expert help you by keeping him/her in the loop. You and your expert are on the same team. abi

Reprinted with permission from the ABI Journal, Vol. XXXIII, No. 3, March 2014.

The American Bankruptcy Institute is a multi-disciplinary, nonpartisan organization devoted to bankruptcy issues. ABI has more than 13,000 members, representing all facets of the insolvency field. For more information, visit ABI World at www.abiworld.org.