Court Rejects Damages Expert’s Claims for Breach of Contract and Unjust Enrichment
The New Jersey District Court recently ruled that an economic damages expert retained by plaintiffs’ counsel in a class action was not entitled to any further compensation for his work. The facts in Rothstein v. Harstad (September 30, 2014) are a virtual catalogue of what an expert witness should not do when rendering professional services.
Ronald Harstad, a professor of economics at the University of Missouri, was retained by plaintiffs’ counsel to perform damages calculations as an expert in a class action lawsuit involving alleged misrepresentations in the sale and marketing of prepaid calling cards. In May 2006, Harstad sent a letter outlining the terms of his engagement, including his hourly rate compensation, his agreement to furnish monthly logs detailing the daily time expenditure, his commitment to use lower rate graduate and undergraduate students to perform appropriate services, and his agreement to accept payment for each invoice over time. By April 2008 plaintiffs’ counsel had furnished Harstad with all of the underlying data and information he needed to perform the damage calculations. Harstad then estimated the cost of making the necessary calculations would be $17,000 - $21,000. Plaintiffs’ counsel relied on Harstad’s estimate in proceeding to have him serve as their expert.
Despite his estimate, Harstad billed and was paid $164,604.79 by September 2008. And, despite his agreement to render monthly logs of his time, Harstad did not submit any invoices for October and November 2008 until December 2008, when he sent an invoice totaling an additional $110,700. That invoice was followed by a December 29th invoice for $50,100. In January 2009, plaintiffs’ counsel objected to those invoices. In response, Harstad instructed plaintiffs’ counsel that, unless the outstanding invoices were paid immediately, they were not to use any of the reports or analyses he had provided since October 2008. Plaintiffs’ counsel chose to reject Harstad’s work and engage another expert. That new expert was able to complete the damage calculations for $22,500, using the same information that had been provided to Harstad .
Plaintiffs’ counsel then filed a declaratory judgment action to establish that they owed no further amounts to Harstad. Harstad counterclaimed for breach of contract and unjust enrichment and sought $410,000 in damages. After a non-jury trial before then Magistrate Judge (now district judge) Madeline Cox Arleo, the court found that Harstad was not entitled to any further compensation or damages.
First, the court noted that Harstad had failed to comply with the terms of his own agreement, failing to submit monthly logs (only 13 “haphazard invoices” over the 28 months he was retained) and failing to use lower paid students for appropriate tasks. As one example, the court pointed out that Harstad had billed at $600 per hour for tasks such as mailing CDs via Federal Express, burning CDs, and evaluating his own billing errors. The court also cited a number of billing errors, including an invoice for 28.4 hours when only 7.3 hours were listed on the invoice, and Harstad’s double –billing of 12.6 hours on other invoices. Providing the court with even less confidence in his billing methods, Harstad testified that the underlying information on his invoices came from entries he had made on Post-It notes that he had since discarded. Harstad also admitted that he had not adjusted his billings for the time he spent correcting these billing mistakes.
Second, the court was persuaded that Harstad did not deserve further compensation, given that he had already received an amount far exceeding his original estimate for work that was ultimately performed by another expert for the amount of Harstad’s original estimate. The court found that Harstad had a duty to update plaintiffs’ counsel as his costs increased but failed to do so in breach of his duty of good faith and fair dealing. The court also took pains to note that Harstad’s work product was “plagued with his own mathematical errors,” noting that his initial damages estimate was subsequently corrected to a figure more than $4,000,000 lower, and that figure was lowered by another $35 million after a paralegal working for plaintiffs’ counsel pointed out that Harstad had multiplied by the wrong column in Excel. All of this led the court to conclude that Harstad had breached his agreement to provide what he had promised —“a defensible damages estimate.”
Third, because Harstad had chosen to rescind his agreement, demanding that plaintiffs’ counsel not use his work product, and plaintiffs’ counsel had accepted that alternative, the court held that Harstad could no longer sue to recover damages for breach of the contract. Judge Arleo noted that rescission and damages were alternative and inconsistent remedies, noting that Harstad had rejected the option of allowing plaintiffs’ counsel to use his work and later suing for damages. Harstad had also breached the implied covenant of good faith and fair dealing by not living up to his own contractual obligations even though he knew plaintiffs’ counsel were relying on his promised performance.
The Rothstein decision should remind experts of the potentially disastrous consequences of laxity and sloppiness in invoices, disregard of essential terms of the engagement, and failure to check that work product is free from mathematical errors. The reputational damage is all the more severe when those defects are highlighted in a judicial decision. Adversary counsel will inevitably now confront Professor Harstad with Judge Arleo’s opinion, and the widely accessible opinion may limit his potential engagement opportunities.