Know The Perils of Financial Testimony by Owners and Employees

Owners, executives and other key employees sometimes testify in litigation involving lost profits or valuation issues. This article explains how to determine when layperson testimony crosses over into expert witness territory, putting it at risk of being excluded from evidence. It also touches on two cases that illustrate when a company leader’s testimony might be allowed vs. excluded.  

United States ex rel. Technica, LLC v. Carolina Cas. Ins. Co., No. 08-CV-01673-H (KSC), S.D. Cal., April 11, 2012

Ruhr v. Immtech International, Inc., 570 F.3d 858, 7th Cir., June 30, 2009

Lay vs. expert testimony

Rule 701 of the Federal Rules of Evidence (FRE) governs opinion testimony by lay witnesses. A nonexpert’s opinion is limited to one that is:

• Rationally based on the perception of the witness,
• Helpful to a clear understanding of the witness’s testimony or the determination of a fact at issue, and
• Not based on scientific, technical or other specialized knowledge within the scope of Rule 702, which governs expert testimony.

A witness’s testimony may be excluded if he or she qualifies as an expert — for example, the witness is a CPA or credentialed valuation analyst — but was not disclosed as such. Or a layperson may be disqualified because he or she doesn’t possess the required scientific, technical or other specialized knowledge to testify on a particular subject.

Lay testimony on financial matters

The opinions of lay witnesses on lost profits and other financial matters may be allowed in certain situations, however. According to the FRE Advisory Committee’s notes, “Most courts have permitted the owner or officer of a business to testify to the value or projected profits of the business, without the necessity of qualifying the witness as an accountant, appraiser, or similar expert. . . . Such opinion testimony is admitted not because of experience, training or specialized knowledge within the realm of an expert, but because of the particularized knowledge that the witness has by virtue of his or her position in the business.”

For example, in a lawsuit for unpaid equipment rentals (United States ex rel. Technica, LLC v. Carolina Cas. Ins. Co.), the company’s CEO was permitted to testify as a lay witness regarding the reasonableness of re-rental charges because of his “particularized knowledge gained from years of experience within his field.”

But when testimony requires more complex financial or valuation knowledge, courts are likely to require an expert. For example, in Ruhr v. Immtech International, Inc., the court rejected testimony from the plaintiff’s president regarding lost profits because it involved a new product in a complex market — financial matters outside of his personal knowledge or perception.

Handle with care

In commercial litigation, exclusion of damages testimony can be devastating. If you’re contemplating the use of an owner or employee to provide financial testimony, carefully consider whether the subject of the testimony requires more specialized knowledge or perception.