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California College Inc. v. UCN Inc.

Court of Appeals of Utah

March 21, 2019

California College Inc., Stevens-Henager College Inc., CollegeAmerica Services Inc., CollegeAmerica Denver Inc., and CollegeAmerica Arizona Inc., Appellees,
v.
UCN Inc. and InContact Inc., Appellants.

          Third District Court, Salt Lake Department The Honorable Heather Brereton No. 090907053

          David M. Bennion, Zack L. Winzeler, and Alan S. Mouritsen, Attorneys for Appellants

          Robert E. Mansfield and Steven J. Joffee, Attorneys for Appellees

          Judge Michele M. Christiansen Forster authored this Opinion, in which Judges Kate Appleby and David N. Mortensen concurred.

          OPINION

          CHRISTIANSEN FORSTER, JUDGE.

         ¶1 This is an interlocutory appeal asking us to determine whether the district court abused its discretion when it denied inContact's pretrial motion to exclude certain expert witness testimony. InContact contends that the data set underlying the experts' opinions at issue failed to meet the standards of reliability set forth by rule 702 of the Utah Rules of Evidence. Because both expert opinions admitted by the court relied on data the parties agree was, to an extent, unreliable, we determine that a threshold showing of reliability was not shown. Accordingly, we vacate the district court's ruling denying inContact's motion to exclude and remand for further proceedings.

         BACKGROUND

         ¶2 The appellant in this case is inContact Inc., formerly known as UCN Inc. We use its current name for clarity. The appellees are a consortium of educational entities including California College Inc., Stevens-Henager College Inc., CollegeAmerica Services Inc., CollegeAmerica Denver Inc., and CollegeAmerica Arizona Inc.[1] For convenience, we refer to them collectively as "the College," mindful that the appellees are separate entities and without ascribing any legal status to the term.

         ¶3 InContact provided enhanced telephone services to assist the College in recruiting students. From February 2006 to April 2007 (Damage Period), the College's offices "were frequently unable to receive inbound calls," and "inbound calls were often incorrectly routed, delayed, or simply lost." These problems allegedly left the College without full telephone capabilities for a total of approximately 108 hours.

         ¶4 In December 2009, the College filed a complaint against inContact, alleging multiple causes of action. The College sought damages equal to its lost profits, asserting that the telephone problems led to lower recruitment, which in turn led to reduced student enrollment and therefore lost profits. The College retained two experts with experience in calculating damages: Ted Tatos, a statistician, and Richard Hoffman, a certified public accountant.

         ¶5 Tatos estimated the number of student enrollments that the College lost during the Damage Period. Tatos used a method known as regression analysis to develop a statistical model for estimating the number of enrollments the College should have had but for the malfunctioning telephone services.[2] To conduct the regression analysis and develop the model, Tatos relied upon data collected by the College. The data reflected, among other things, how many potential students had contacted the College, how many interviews were conducted, and how many students had enrolled. Tatos compared the figures from January 2003 to March 2006 (before the Damage Period) and June 2007 to December 2010 (after the Damage Period) with the figures from the Damage Period. These figures ostensibly were drawn from the College's internal operating reports (OPS Reports). Using his regression model, Tatos estimated that the College suffered 1, 254 lost student enrollments as a result of the faulty telephone services.

         ¶6 Hoffman used Tatos's estimate of lost enrollments to calculate the College's lost profits. He first determined the average net tuition dollars the College received for each student who enrolled during 2006 (roughly $19, 000) and subtracted the costs the College would have incurred to generate that tuition (roughly $3, 300). Hoffman then multiplied this result by the number of lost enrollments calculated by Tatos and arrived at approximately $19.7 million in lost profits.[3] Hoffman's original report proffered these analyses and his damages estimate.

         ¶7 InContact moved to exclude Tatos and Hoffman as expert witnesses. It submitted two rebuttal expert reports-one from Patrick Kilbourne, a forensic accountant, and one from Steven Waters, an economist. Kilbourne's report cast doubt on the accuracy of the data set Tatos used, while Waters's report challenged the reliability of Tatos's statistical model based upon the data.

         ¶8 Kilbourne first noted that the values assigned to the variables Tatos used were incorrect. Instead of relying on the actual OPS Reports, Tatos used a "summary" prepared by Carl Barney, one of the owners of one of the colleges. Barney drew some values from the OPS Reports but also supplemented those with his own estimates. It was Barney's "summary," prepared specifically for the purpose of the lawsuit, that had been provided to Tatos and upon which Tatos based his regression analysis and the resulting statistical model. Kilbourne also identified some of the flaws in the OPS Reports. Because the OPS Reports each included twelve to eighteen months of rolling data, a particular month appeared in multiple reports and the numbers reflected for that month could vary for a variety of reasons. For example, the OPS Reports that included January 2007 recorded the number of interviews conducted during that month variously as 582, 594, 622, 631, and 654. Tatos used the lowest value in his analysis, without explanation, and Kilbourne criticized this approach because it resulted in a model that maximized the estimated shortfall. Moreover, Kilbourne noted that many of the numbers provided by Barney and used by Tatos did not match any of the OPS Reports.[4]

         ¶9 Waters's report first rebutted the concept of lost enrollments, suggesting that the changing unemployment rate produced lower enrollments-a variable not accounted for in Tatos's model. Had Tatos incorporated the unemployment rate as a variable, Waters suggested, Tatos would have found that the data predicted no lost enrollment. Waters then opined that Tatos's model was overly sensitive to changes in the input values. To demonstrate this shortcoming, Waters plugged different sets of values into Tatos's statistical model. Waters first used values from the most recent OPS Reports, noting that the College's lawyers had described those figures as "the 'most accurate and up-to-date' data." Waters concluded that, "[b]y simply using [these values] instead of the [values] used by Mr. Tatos, I find that Mr. Tatos's model estimates [lost enrollments] of 588-a decrease of over 53% from 1, 254-and this is without accounting for the unemployment rate." Waters also applied two other sets of numbers to Tatos's model: Tatos's data through 2007, which resulted in a calculation of 358 lost starts, and the OPS report data through 2007, which resulted in a calculation of 275 lost starts. In other words, Waters opined that (1) Tatos's model was flawed because it did not account for any change in the unemployment rate; and (2) even if not flawed in this manner, Tatos's model was too sensitive because it generated drastically different results when the input values were changed.[5]

         ¶10 In response, the College submitted an updated expert report from Hoffman. Hoffman's updated report acknowledged that the values used in his original report were inaccurate. In his updated report, Hoffman noted that the College had "decided that the data used by Dr. Waters provided the most reasonable estimate of" the inquiry, interview, and enrollment figures. Hoffman therefore performed his calculations anew, starting with 588 lost enrollments and multiplying that by the same net per-student profit margin he had calculated before. In essence, Hoffman utilized the same numbers Waters had used to show that Tatos's model was oversensitive, but neither Waters nor Hoffman had independently verified the data set by checking against the raw numbers. On this basis, Hoffman re-estimated the College's lost profits at roughly $9.2 million.[6]

         ¶11 After Hoffman submitted his updated report, both Kilbourne and Waters updated their expert reports as well. InContact's experts continued to disagree with the analysis and conclusions reached by Hoffman. Waters asserted, "[T]he analysis I put forward in [my first] report was done for the sole purpose of demonstrating the sensitivity of [the College's] findings. I did not, and still do not, consider [the ...


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