Court: Mississippi Supreme Court; September 6, 2012; Mississippi; State Supreme Court
A decision from the Hinds County Circuit Court awarded $3,603,712 to tenants of an apartment complex for damages related to negligence in maintaining a leaking pipe. The defendants, including Parham Pointe North, LLC, Parham, K. Wayne Rice, and Ballard Realty Company, appealed the ruling. The court found that the trial court improperly admitted unreliable expert testimony, allowed inappropriate lay opinion testimony, and failed to exclude restoration costs when fair market value was not established. Additionally, it ruled that the trial court erred in denying a new trial on damages, particularly regarding an award for lost profits without evidence of past profits, which contradicted state law and the evidence. Consequently, the judgment was reversed, and a new trial on damages was ordered.
Prior to the incident in May 2007, tenant Ohazurike had reported a leaky pipe that subsequently damaged board, card, and video games he had created. Testimony indicated that the apartment management did not adequately address the water damage. Ohazurike claimed to have designed over 150 games, yet only marketed two, with his company reporting net losses over a decade. Despite having created several copyrighted games, he faced challenges in obtaining financing for production, and previous efforts to secure investment were unsuccessful. His overly optimistic business plan and an unsupported valuation attempt did not yield any financial backing from potential investors.
On December 11, 2007, the Ohazurikes filed a complaint in Hinds County Circuit Court against defendants Parham, Arlington Properties, Inc., Ballard, Rice, and their agents/employees. The case was removed to federal court in January 2008, but was remanded to state court in July 2009 due to the absence of federal claims and lack of diversity among parties. The original complaint included allegations of racial discrimination, fraud, assault, and defamation, but the Ohazurikes later narrowed their claims to negligent maintenance and repair of a pipe that burst in their apartment. This negligence allegedly caused damage to intellectual property related to nineteen games designed by Ohazurike and resulted in medical issues for the Ohazurikes, including respiratory problems and permanent scarring from contact dermatitis.
Following remand, several pretrial motions were filed. Notably, Ballard sought to exclude the Ohazurikes’ expert witnesses, which the court denied for Glover and Lightheart while allowing Chance and Johnson to testify. Ballard also filed motions in limine to suppress evidence regarding the valuation of the Ohazurikes’ games and claims of racial discrimination. A jury trial commenced on July 12, 2010, with expert witnesses including Glover, who provided estimates for lost future profits based on various analyses, including the Ohazurikes’ business plan and market research.
Johnson assessed the repair costs for nineteen games by extrapolating the expense of restoring a single game with the help of two technicians. Lightheart provided a valuation report based solely on Ohazurike’s business plan projections, without conducting any independent analysis of the business's financial records. Chance, a mortgage broker and friend of Ohazurike, testified about the potential to broker 60,000 units of Ohazurike's "Stock Market" game, created in 1986. The jury found the Defendants fully liable, awarding $3,603,712 in total damages to the Ohazurikes, broken down as follows: Benny received $2,000,000 for future lost profits related to intellectual property, $2,208 for medical expenses, and $500,000 for pain and suffering; Esther received $253 for medical expenses and $500,000 for pain and suffering; Darlington received $1,251 for medical expenses, $500,000 for pain and suffering, and $100,000 for permanent disfigurement.
Ballard filed several motions contesting the verdict, arguing that it was unjust and unsupported by evidence. Parham and Rice joined with similar motions, claiming the damages were excessive and influenced by bias, as well as contesting the admissibility of expert and lay witness testimonies. The trial court denied all motions, leading to an appeal by Ballard, Parham, and Rice.
The appeal raised several key issues, including the admissibility of expert testimonies, the sufficiency of evidence for lost-profit claims, and the validity of personal injury claims. The court identified issues one, two, and five as critical, necessitating a new trial, while issues three and four were not addressed. The court applies an abuse-of-discretion standard for reviewing trial court decisions regarding new trials and evidence admission.
The trial court abused its discretion by permitting Glover to testify due to significant discovery violations by the Ohazurikes. These violations included the failure to timely disclose the substance of Glover's expected testimony and to supplement discovery responses adequately. Under Mississippi Rule of Civil Procedure 26(b)(4), parties must identify expert witnesses and provide detailed information regarding their testimony, including facts and opinions. The Ohazurikes initially named Glover as an expert but did not adequately disclose the substance of her opinions or a summary of their grounds. They only provided this information shortly before her deposition, just five days prior to trial. Furthermore, they violated Rule 26(f) by introducing a new opinion at trial without amending their prior discovery responses, which constituted a material change in Glover's testimony. The court's failure to address these discovery violations and the introduction of new expert testimony without prior disclosure constituted an abuse of discretion, justifying a reversal of the trial court's decision. The principle of "trial by ambush" was highlighted, emphasizing that defendants are entitled to comprehensive disclosure of expert testimony before trial.
The trial court erred by admitting the expert testimony of Glover, Johnson, and Lightheart due to noncompliance with Mississippi Rule of Evidence 702, which governs the admissibility of expert testimony. Glover was to provide opinions on lost income valuation based on a report by Kevin Lightheart and Upstart Games' business plan. A motion to exclude her testimony was filed, arguing that she was not properly designated as an expert and that her testimony lacked reliability. The court must ensure expert testimony is relevant and reliable through a two-pronged inquiry.
Glover's testimony was found inadequate even without considering discovery violations. Her lost-profit estimates were based on unsupportable data, failing to meet the standards of Rule 702. Specifically, Glover's calculation of $15.6 million in lost profits was derived from an unrealistic sales projection that disregarded actual past business losses and relied on an unsubstantiated growth rate for a struggling enterprise. This flawed methodology rendered her testimony unreliable and ultimately inadmissible.
Glover's estimates of damages failed to meet the standards of Rule 702, which requires expert opinions to rely on sufficient facts and reliable methods. Her initial estimate of $15.6 million was derived from a flawed business plan by Ohazurike, which assumed unrealistic sales figures despite four of the six games being undamaged. Glover ignored the history of the business, which had only sold 10,000 units since inception, and did not account for necessary deductions such as overhead and taxes. Consequently, the trial court erroneously admitted her testimony.
At trial, Glover presented a revised estimate of $2.85 million, calculated using a simplistic formula that multiplied anticipated gross sales by unit price and number of games, without considering manufacturing costs or present value. This estimate was based on inconsistent historical sales data and an unsupported assumption that Ohazurike would sell 5,000 units of each of the nineteen damaged games. Evidence showed Ohazurike had never made a profit and had sold games at significantly lower prices than the $30 per unit she cited. Additionally, there was no proof of financing to produce these games, nor any foundation for the assumption that he could sell large quantities of untested products. Overall, Glover's revised estimate lacked a factual basis and did not adhere to reliable principles or methods.
Glover's $2.85 million estimate was deemed unreliable due to her use of sporadic past unit sales and a current "collectible" price without accounting for costs, expenses, financing, or present value adjustments. Future lost profits must be calculated as net profits, discounted to present value after deducting overhead, depreciation, taxes, and inflation. Glover's failure to apply these principles indicated an assumption that all sales would occur immediately and in unrealistic quantities, disregarding actual sales data from the past 14 years. As a result, her testimony did not meet the standards set by Rule 702 and relevant case law, leading to the conclusion that the trial court abused its discretion in admitting it.
Johnson's testimony regarding the conversion of video-game concepts into board games was relevant but strayed from recoverable damages, as it represented a fundamental change rather than restoration to pre-damage condition. This approach risked unjust enrichment, contrary to established principles that seek to make the injured party whole without allowing for profit from damages. Additionally, Johnson's method for estimating restoration costs was flawed, as it applied uniform time and cost assumptions across all games without considering their individual stages of development. Therefore, the trial court also abused its discretion by admitting Johnson's testimony regarding the restoration costs of the board games.
The fact-finder did not receive the fair market value of any game at the time of loss, which is critical for determining damages. If restoration costs are lower than fair market value at the time of loss, restoration damages may be awarded; however, if they exceed fair market value, only fair market value is recoverable. Plaintiffs are prohibited from recovering both lost profits and restoration expenses, as double recovery is not permitted in this jurisdiction. The measure of damages aims to make the injured party whole without allowing for profit from the loss. The trial court erred in admitting Johnson’s expert testimony because he lacked qualifications to assess restoration costs for video-game plans and improperly suggested damages that did not return Ohazurike to his pre-damage status. Furthermore, Johnson’s testimony was unsupported by evidence of the pre-event fair market value of the games.
Regarding Kevin Lightheart’s testimony, the Defendants contended it was neither relevant nor reliable. Although Lightheart had expertise in accounting and valuation, his 2006 valuation of Upstart, intended to assist Ohazurike in securing financing, was based on a flawed business plan rather than historical data. He acknowledged that his valuation did not calculate the fair market value of any specific game and clarified that it was not meant to prove lost profits. Lightheart's valuation was based on assumptions from Ohazurike’s business plan for six games, including some not damaged, and he admitted that the valuation was an optimistic depiction of a speculative investment rather than a realistic profit estimate.
Lightheart's opinion was deemed unreliable under Rule 702 because he failed to use sound principles and methods and did not base his opinion on sufficient facts regarding lost profits. The court emphasized that lost profits must be proven with reasonable certainty, referencing Cont’l Turpentine, Rosin Corp. v. Gulf Naval Stores Co. Lightheart's valuation, derived from Ohazurike’s business projections, mirrored Glover’s inflated estimate and relied on unreliable assumptions. He acknowledged that using historical data would have significantly lowered his valuation, indicating the trial court abused its discretion by admitting his testimony.
The court also found that Chance, an unqualified lay witness, should not have been permitted to provide opinion testimony regarding brokering games. Chance lacked the necessary expertise and experience, as he was a mortgage broker and friend of Ohazurike, without relevant background in game distribution. His claim of being able to broker 60,000 units of the "Stock Market" game was deemed inadmissible, as it did not stem from rational perceptions or firsthand experience in the field. Given that Chance had limited experience selling only a small number of games and had been rejected by over 100 companies in his attempts to broker, the court concluded that his opinion was based on unfounded aspirations rather than credible evidence. Therefore, the trial court erred by allowing Chance's testimony.
The trial court abused its discretion in denying a new trial due to unreliable and speculative testimony regarding Chance's ability to broker or distribute games, which did not meet the standards of Mississippi Rule of Evidence 701. The court found the evidence insufficient to support the damages awarded for personal injury claims, leading to a conclusion that allowing the verdict to stand would result in a miscarriage of justice. The claims of lost profits were similarly deemed unproven, lacking a reasonable degree of certainty, and no rational fact-finder could have concluded that such profits existed. Testimony from Glover was found unreliable under Rule 702; her reliance on past unit sales to estimate future profits was misleading and insufficient. Glover's projections were based on conjecture, as Ohazurike had only successfully sold two of over 150 games he designed and had never earned a profit. The evidence failed to establish that Ohazurike's business was an established one with ascertainable profits, thus failing to meet the necessary legal standards for lost-profit damages.
Glover's reliance on sporadic past sales was deemed insufficient to substantiate claims of lost profits, as it did not provide actual facts necessary for a rational conclusion about the loss. The trial court's admission of this evidence constituted reversible error, leading to the reversal of its judgment and a remand for a new trial focused solely on damages. Ohazurike's testimony clarified that "production ready" referred to the finalization of materials for manufacturing games. During the proceedings, several defendants were dismissed, and the remaining parties included Parham, Ballard, Rice, Crystal Bridges-Corcoran, and John Does 1 through 10. Notably, Darlington did not testify about his pain and suffering. The Ohazurikes designated Glover as an expert witness to assess the valuation of lost income and damages related to their intellectual property. Glover's report estimating lost profits at $15.6 million was provided just days before the trial began, along with two profit estimates with differing assumptions about game sales. The report cited IRS rules for valuing closely-held corporations, focusing on multiple financial factors. Glover’s estimates varied based on Ohazurike's ability to market the games, reflecting differing assumptions without clear explanation.
Past profits can be utilized to estimate future profits, as established in Lovett v. E.L. Garner, Inc. However, in this case, it was determined that no past profits existed, as Upstart reported losses totaling $34,000 over a ten-year period. For past profits to serve as reliable evidence for future profit loss, the business must be well-established with a track record of consistent profits. The evidence presented indicated that Oha-zurike's business did not meet this criterion, having sold only 10,000 units from 1996 to around 2003-2004, with no sales in the three to four years prior to the event in question. Additionally, Oha-zurike failed to demonstrate any sales or business activities related to the undamaged games or to secure his filings from the United States Copyright Office to prepare his other games for market. No expert witness provided the fair market value for any game. Chance's testimony regarding a potential brokering deal for 60,000 units was considered lay opinion and was not supported by established guidelines for admissibility under Rule 701, which allows for lay opinions only when based on first-hand knowledge and helpful in resolving the issues. The court indicated that while no fixed certainty is required for proving future profit loss, past profits are a commonly accepted guideline.
