CZ Services, Inc. v. Express Scripts Holding Company ( 2020 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 CZ SERVICES, INC., et al., Case No. 3:18-cv-04217-JD 8 Plaintiffs, ORDER RE EXPERT WITNESS 9 v. MOTIONS, MOTION TO STRIKE, AND DISCOVERY 10 EXPRESS SCRIPTS HOLDING COMPANY, et al., Re: Dkt. Nos. 241, 243, 246, 247, 303, 332 11 Defendants. 12 13 This order resolves the parties’ motions to exclude expert witnesses, Dkt. Nos. 241, 243, 14 246, 247, and ESI’s related motion to strike, Dkt. No. 303. It also addresses a letter from ESI 15 about developments in the ownership of CZ Pharmacies. Dkt. No. 332. Detailed statements about 16 the parties, claims, and salient facts are presented in the Court’s orders on the TRO application, 17 transfer of venue, and summary judgment. See Dkt. Nos. 57, 92, 333. In keeping with the prior 18 orders, this order refers to plaintiffs as “CZ Pharmacies.” Together with Care Zone Inc. 19 (“CareZone”) and Jonathan Schwartz, they are counterclaim-defendants in this case. Defendants 20 are “ESI.” The parties’ familiarity with the record is assumed. 21 I. LEGAL STANDARDS 22 Federal Rule of Evidence 702 governs the admissibility of expert witnesses. The 23 touchstones for admissibility under Rule 702 are the relevance and reliability of the expert 24 witness’s opinions. The Court performs a “gatekeeping role” to ensure that expert witness 25 opinions are valid and reliable, and will “assist the trier of fact to understand the evidence or to 26 determine a fact in issue.” Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 590-91, 597 27 (1993) (quoting Rule 702). Relevance is sometimes given less attention as a gatekeeping factor, 1 may be flawless, but “[e]xpert testimony which does not relate to any issue in the case is not 2 relevant and, ergo, non-helpful.” Id. at 591 (internal citation omitted). The testimony must “fit” 3 the case, and be tied to the claims and facts in a way that helps the jury decide the dispute between 4 the parties. Id. 5 The reliability factor looks at “whether the reasoning or methodology underlying the 6 testimony is scientifically valid” and “whether that reasoning or methodology properly can be 7 applied to the facts in issue.” Id. at 592-93. This is a flexible inquiry. See Brickman v. Fitbit, 8 Inc., Case No. 3:15-cv-02077-JD, 2017 WL 6209307, at *3 (N.D. Cal. Dec. 8, 2017) (citing 9 Murray v. S. Route Mar. SA, 870 F.3d 915, 922 (9th Cir. 2017)). Relevant factors include: “(1) 10 whether the theory can be and has been tested, (2) whether the theory has been peer reviewed and 11 published, (3) what the theory’s known or potential error rate is, and (4) whether the theory enjoys 12 general acceptance in the applicable scientific community.” Id. (quoting Murray, 870 F.3d 13 at 922). These factors “are not a definitive checklist or test” and “the reliability analysis remains a 14 malleable one tied to the facts of each case.” Id. (quoting Murray, 870 F.3d at 922). The goal is 15 to ensure “that the expert employs in the courtroom the same level of intellectual rigor that 16 characterizes the practice of an expert in the relevant field.” United States v. Ruvalcaba-Garcia, 17 923 F.3d 1183, 1189 (9th Cir. 2019) (internal quotation and citation omitted). 18 As the Court has often emphasized, Rule 702 is not directed to “the correctness of the 19 expert’s conclusions but the soundness of his methodology.” Brickman, 2017 WL 6209307, at *4 20 (quoting Daubert v. Merrell Dow Pharm., Inc. (Daubert II), 43 F.3d 1311, 1318 (9th Cir. 1995)). 21 If the method is valid and accepted in the field, and fits the case, it will be admitted; attacks on the 22 quality of the data the expert used, the application of the methodology to the data, and the overall 23 persuasiveness of the expert’s opinions are matters for cross-examination. Wendell v. 24 GlaxoSmithKline LLC, 858 F.3d 1227, 1237-38 (9th Cir. 2017) (citing Estate of Barabin v. 25 AstenJohnson, Inc., 740 F.3d 457, 463 (9th Cir. 2014) (en banc) and Daubert, 509 U.S. at 596). 26 The “district judge is a gatekeeper, not a fact finder.” Primiano v. Cook, 598 F.3d 558, 564-65 27 (9th Cir. 2010) (internal quotation and citation omitted). 1 An expert’s opinion “is not objectionable just because it embraces an ultimate issue” in a 2 case. Fed. R. Evid. 704(a). But legal opinions are not the proper subject of expert testimony. 3 Reed v. Lieurance, 863 F.3d 1196, 1209 (9th Cir. 2017). An expert may not give opinions that are 4 legal conclusions, United States v. Tamman, 782 F.3d 543, 552-53 (9th Cir. 2015), or attempt to 5 advise the jury on the law, Strong v. Valdez Fine Foods, 724 F.3d 1042, 1046-47 (9th Cir. 2013). 6 The Court has broad discretion and latitude to determine admissibility under Rule 702. 7 Estate of Barabin, 740 F.3d at 463. No particular procedure is required. Id. 8 II. CZ PHARMACIES’ MOTIONS 9 A. Dr. Alyson Wooten (Dkt. No. 241) 10 ESI has proffered Dr. Alyson Wooten as an expert witness. Dr. Wooten states that she is 11 the Associate Director of Berkeley Research Group’s Health Analytics Practice. Dkt. No. 240-6 12 at 1. She holds a pharmacy doctorate and a J.D., has served as a pharmacist in multiple settings, 13 including retail, and has provided legal and regulatory advice to pharmacy clients as a lawyer and 14 a consultant. Id. at 1-2. ESI seeks to call Dr. Wooten at trial to opine on her conclusions that: (1) 15 the CZ Pharmacies do not function as retail pharmacies; (2) the CZ Pharmacies are “not conducive 16 to quality retail pharmacy care;” (3) the designation of CareZone and CZ Pharmacies as an 17 “agent” of a customer is not consistent with how agency is used in retail pharmacy practice; (4) 18 the standard in the industry is to obtain licenses in every state in which a pharmacy’s patients 19 reside; (5) the CZ Pharmacies made misrepresentations in applications for several state licenses; 20 and (6) the CZ Pharmacies regularly shipped prescriptions into states where they were not yet 21 licensed. See id. at 3. 22 These opinions are largely inadmissible as expert testimony. For the most part, they are 23 little more than reports of what Dr. Wooten personally saw in visits to various CZ Pharmacies 24 locations, or in documents she reviewed about CZ Pharmacies’ operations. They are much more 25 akin to percipient witness observations than to opinions arrived at through a scientific inquiry or 26 expert analysis. Dr. Wooten’s report is striking for the complete absence of any methodological 27 discussion at all. Her “method” consisted mainly of walking into CZ Pharmacies’ properties and 1 Nor are these opinions directed to a subject matter beyond the ken of ordinary jurors. It is 2 fair to say that just about any citizen who may serve on the jury in this case is familiar with what 3 retail pharmacy businesses look like and how they function. The Court previously advised the 4 parties that expert testimony on this and related issues would be of doubtful admissibility. See 5 Dkt. No. 213 at 53:15-57:9; Dkt. No. 237 at 41:16-44:20. Dr. Wooten’s report and proposed 6 testimony have changed that doubt into a certainty against admissibility. 7 Dr. Wooten may present at trial her opinions about pharmacy licensing standards and 8 practices. This is a specialized area where expert testimony might be helpful to the jury on the 9 issue of whether CZ Pharmacies was licensed to do business in the locations and at the times 10 relevant to ESI’s defenses. See United States v. Laurienti, 611 F.3d 530, 547-49 (9th Cir. 2010) 11 (expert witness may testify to industry rules and defendants’ practices). CZ Pharmacies objects 12 that Dr. Wooten is not qualified by training or experience for this testimony, but she holds a 13 Doctor of Pharmacy degree and worked for several years as a pharmacist and consultant on 14 pharmacy-related issues. That is sufficient for her to testify. CZ Pharmacies may “evaluate 15 critically her further qualifications upon cross-examination or in argument.” United States v. 16 Rahm, 993 F.2d 1405, 1413 (9th Cir. 1993). So too for the “inaccurate statements” that CZ 17 Pharmacies finds in Dr. Wooten’s proposed opinions. See Primiano, 598 F.3d at 565-67. 18 Dr. Wooten may also present her analysis comparing CZ Pharmacies’ licenses to the dates 19 on which it dispensed drugs to patients. This analysis involved approximately one million 20 transactions, and is well within the zone of opinions that may assist the jury in weighing ESI’s 21 defenses. 22 Within this limited set of opinions, Dr. Wooten may not say at any point that CZ 23 Pharmacies’ practices were illegal or unlawful. The request to strike Dr. Wooten’s supplemental 24 report is denied. Parties are required to supplement expert disclosures as necessary under 25 Rule 26(a)(2)(E) until at least 30 days before trial “if the party learns that in some material respect 26 the disclosure or response is incomplete or incorrect.” See Fed. R. Civ. P. 26(a)(3), 26(e)(2). Dr. 27 Wooten’s corrective report was filed on November 4, 2019, more than four months before the 1 B. Mr. David A. Kvancz (Dkt. No. 243) 2 ESI has also proffered Mr. Kvancz as an expert witness. Mr. Kvancz is a healthcare 3 consultant who has served in senior pharmacy leadership roles at Kaiser Permanente and the 4 Cleveland Clinic. Dkt. No. 242-6 at 1-3. ESI seeks to call him at trial to testify as to his opinions 5 that: (1) retail and mail order pharmacy operations are not interchangeable; (2) the CZ Pharmacies 6 do not operate as retail providers; (3) the CZ Pharmacies operate as mail order pharmacies; (4) CZ 7 California made misrepresentations in its provider certifications to ESI relating to its mail order 8 operations; (5) CZ Tennessee made similarly false representations on its provider certification 9 form; (6) CZ Pharmacies’ practice of sending 99% of ESI member prescriptions outside the state 10 and/or 15 mile local area is inconsistent with retail operations; (7) CZ Pharmacies’ claims data for 11 other PBMs demonstrates its mail order operations; (8) use of a third-party, Parliament, in CZ 12 Pharmacies’ delivery operations is consistent with mail order practice; and (9) use of Parliament in 13 CZ Pharmacies’ operations creates quality and safety concerns. See id. at 4-5. 14 Mr. Kvancz’s proposed testimony overlaps considerably with Dr. Wooten’s, and his 15 opinions will be limited in exactly the same way. The Court’s main concern with Mr. Kvancz is 16 that his testimony will be unduly duplicative and redundant of Dr. Wooten’s testimony, a concern 17 the Court expressed at the hearing. Dkt. No. 328 at 84:17-23. For example, the record indicates 18 that he and Dr. Wooten performed very similar investigations about the location of CZ 19 Pharmacies’ customers, and reached similar conclusions such as “the vast majority of [CZ 20 Tennessee’s] prescriptions at this time (approximately 95%) were being mailed out of state.” Dkt. 21 No. 240-6 at 30 (Dr. Wooten); Dkt. No. 242-6 at 57 (same for Mr. Kvancz). The parties are 22 advised that duplicative expert testimony will not be permitted at trial. 23 III. ESI’S MOTIONS 24 A. Dr. Doug Hillblom And Mr. Richard B. Mazzoni (Dkt. No. 247) 25 CZ Pharmacies has proffered Dr. Hillblom and Mr. Mazzoni as expert witnesses. Dr. 26 Hillblom is a pharmacist and health care consultant who has worked on pharmacy-related issues 27 for a PBM/insurer, a hospital group, and the state of California, among others. Dkt. No. 248-4 1 between CZ Pharmacies and CareZone, which provides an online app for pharmacy customers. 2 Id. at 4. He will opine that: (1) CZ Pharmacies’ business partnership with CareZone is an 3 innovative business model; (2) CZ Pharmacies’ operations are consistent with industry 4 understandings of retail pharmacies; (3) the operations of CZ Pharmacies are consistent with 5 contractual obligations to ESI and other PBMs under relevant industry understandings; and (4) the 6 business model allows app users to better manage their prescriptions. See id. at 5-6. 7 Mr. Mazzoni is also a pharmacist and healthcare consultant. Dkt. No. 248-6 at 1-2. He 8 has served on multiple state boards of pharmacy and in senior positions at CVS Caremark, a large 9 pharmacy chain and PBM, as well as another pharmacy, with a focus on regulatory compliance. 10 Id. CZ Pharmacies offers Mr. Mazzoni to opine that: (1) CZ Pharmacies operate as a retail 11 pharmacy, and not a mail order business; (2) ESI and its experts are trying to influence or replace 12 state boards of pharmacy as the sole entity responsible for ensuring patient safety and compliance 13 with state law; (3) ESI’s experts incorrectly assert that CZ Pharmacies operates unsafely or out of 14 compliance with industry standards; (4) the physical appearance of a pharmacy is not indicative of 15 its practice type; (5) reporting changes in the pharmacist-in-charge (PIC) position to a state board 16 of pharmacy can be delayed and has little impact on patient safety; (6) CZ Pharmacies timely 17 reported PIC changes to the appropriate regulator; (7) CZ Pharmacies maintained appropriate 18 licensure; and (8) CZ Pharmacies did not make misrepresentations on licensing applications. Id. 19 at 4. 20 Consistent with the determinations for Dr. Wooten and Mr. Kvancz, Dr. Hillblom and Mr. 21 Mazzoni may testify about pharmacy industry and regulatory practices, licensing requirements, 22 and whether CZ Pharmacies provided appropriate patient care. Neither Dr. Hillblom nor Mr. 23 Mazzoni may testify about their interpretation of any terms in CZ Pharmacies’ contracts with ESI, 24 including “mail order” and “retail,” or whether any contractual provisions were satisfied or 25 breached. Dkt. No. 328 at 88:2-90:8. Construing the words in a contract is a question of law for 26 the Court, see Webbe v. Keel, 369 S.W.3d 755 (Mo. App. 2012), and testimony about contract 27 compliance would necessarily implicate a legal conclusion. 1 Dr. Hillblom’s opinions about agency law, CZ Pharmacies’ corporate structure, and 2 competition in the provision of pharmacy services are also excluded. See Dkt. No. 248-4 at 30-33. 3 The agency law topic is obviously impermissible legal opinion, and Dr. Hillblom’s background as 4 a pharmacy executive does not qualify him to give testimony on issues of corporate structure and 5 competition. Those topics are also well suited to testimony by CZ Pharmacies’ employees, who 6 are likely to know them as part of their jobs. 7 B. Ms. Lisa C. Snow (Dkt. No. 246) 8 CZ Pharmacies has proffered Ms. Snow as a damages expert to opine on how the valuation 9 of CZ Pharmacies as an ongoing business changed after ESI terminated its network provider 10 contracts. Dkt. No. 245-5 ¶ 7. In her initial report, Ms. Snow used methods she called an “Income 11 Approach” and a “Market Approach” to conclude that the termination reduced CZ Pharmacies’ 12 valuation by $439 million to $538 million. Id. ¶ 10. In her supplemental report, these figures 13 were revised slightly downward to a range of $436 million to $535 million. Dkt. No. 265-7 ¶ 72. 14 She also purported to calculate the pharmacies’ lost profits. Dkt. No. 245-5 ¶ 11. Ms. Snow is a 15 managing director at a firm that provides damages and valuation consulting for litigation. Id. ¶ 1. 16 She holds, among other degrees, an MBA from the University of Chicago Booth School of 17 Business, and has testified on a number of occasions as a damages and valuation expert. Id. ¶¶ 2- 18 6. 19 The parties’ dispute over the admissibility of Ms. Snow’s opinions focuses on the validity 20 and reliability of her valuation methodology, but there are also questions about the fit of her 21 opinions to the facts and issues in this case, and whether her testimony would be relevant and 22 helpful. Based on the record as it currently stands, the Court is inclined to exclude Ms. Snow and 23 her proposed testimony in toto over serious concerns about relevance and reliability. Before doing 24 that, the Court will hold an additional hearing on these admissibility issues, which the Court noted 25 at oral argument was a possibility. Dkt. No. 328 at 78:6-12. 26 On the threshold question of relevance and fit, it is not at all clear how Ms. Snow’s 27 valuation opinions are tied to any of CZ Pharmacies’ claims or damages theories in this case. She 1 ‘Valuation Date’) but for the actions of Express Scripts as of April 12, 2017 (the ‘Cease and 2 Desist Date’) and July 13, 2018 (the ‘Network Dismissal Date’) by way of the April 2, 2018 3 termination letter to CZ Services, Inc. and the April 18, 2018 letter to CareZone Pharmacy.” Dkt. 4 No. 245-5 ¶ 7. Her opinions are expressly based on ESI’s cease-and-desist and termination letters 5 as the cause of the change in valuation. Dkt. No. 265-7 ¶ 3. She calculated “CareZone 6 Pharmacy’s growth through the Valuation Date, but for the termination following Express Scripts 7 Cease and Desist letter.” Dkt. No. 245-5 ¶¶ 54, 110, 111; see also Dkt. No. 265-7 ¶ 50 (“Lost 8 Profits analysis contains a projection of the ‘actual’ world, where CareZone is dismissed from 9 Express Scripts’ network, and a ‘but-for’ world, where CareZone did not receive a cease and 10 desist letter and was not terminated from Express Scripts’ network”). 11 The problem is that this before-and-after valuation of CZ Pharmacies as an ongoing 12 enterprise is not tethered to a specific claim for damages in this case. CZ Pharmacies did not sue 13 ESI for breach of contract, and so Ms. Snow’s valuation analysis is not germane to contract 14 damages. CZ Pharmacies has not made a specific damages claim in connection with the 15 Tennessee AWP statute, Tenn. Code Ann. § 56-7-2359, and nothing in the statute appears to 16 indicate that damages would be available even if CZ Pharmacies were to prevail on the limited 17 portion of the claim that survived summary judgment. See Dkt. No. 333 at 9-13. 18 For the defamation claims, which are a significant part of CZ Pharmacies’ case against 19 ESI, Ms. Snow made no effort to tie her valuation analysis to defamation injury. Her initial and 20 supplemental reports make a passing reference to ESI’s defamatory statements that “harmed CZ 21 Services because CZ Services operates in a highly regulated pharmaceutical industry,” but the 22 connection between her model and this alleged harm is never discussed in a meaningful way. See 23 Dkt. No. 245-5 ¶ 17; see also Dkt. No. 265-7 ¶ 4. To the contrary, she focuses on how 24 termination, and the threat of it, affected CZ Pharmacies. See, e.g., Dkt. No. 245-5 ¶ 44; see also 25 Dkt. No. 265-7 ¶ 5 (same in supplemental report). In addition, she did not attribute any portion of 26 the valuation or lost profits damages to specific defamatory statements, as she should have done. 27 See Coastal Abstract Serv., Inc. v. First Am. Title Ins. Co., 173 F.3d 725, 729 (9th Cir. 1999). 1 The same lack of relevance is true for CZ Pharmacies’ unfair competition claims. Under 2 California law, for example, no damages are available for unfair competition, and monetary relief 3 is limited to restitution of money lost by the plaintiff and obtained by the defendant. See Sharpe v. 4 Puritan’s Pride, Inc., ___ F.Supp.3d ___, 2020 WL 3128900, at *2-*3 (N.D. Cal. 2020). It is 5 highly doubtful that a change in enterprise valuation could be deemed a restitutionary measure or 6 remedy. Ms. Snow certainly did not discuss or present it as such. 7 So too for CZ Pharmacies’ claim for intentional interference with prospective economic 8 relations. As Ms. Snow’s report indicates, her valuations are directly related to the assumption 9 that CZ Pharmacies lost possible venture-capital and other investments. See, e.g., Dkt. No. 245-5 10 ¶ 40. That is too speculative a loss. See Youst v. Longo, 43 Cal.3d 64, 74 (1987). The mere “hope 11 for an economic relationship and a desire for future benefit” do not allow for intentional 12 interference damages. Blank v. Kirwan, 39 Cal.3d 311, 331 (1985). 13 To be sure, relevance for Rule 702 purposes is not a particularly high bar. It demands 14 “only that the evidence ‘logically advances a material aspect of the proposing party’s case.’” 15 Messick v. Novartis Pharm. Corp., 747 F.3d 1193, 1196 (9th Cir. 2014) (quoting Daubert II, 43 16 F.3d at 1315). But even generously construed, Ms. Snow’s proposed opinions lack any obvious 17 relationship to the damages that might be available to CZ Pharmacies. 18 Another factor calls the relevance of her opinions into further doubt. A fundamental 19 assumption of her analysis -- that CareZone (the app company) owns CZ Pharmacies and the 20 corollary premise that the pharmacies are a “component” of the affiliated CareZone entities -- 21 seems to conflict with plaintiffs’ liability case. Dkt. No. 245-5 ¶¶ 29, 31. As the Court discussed 22 in the summary judgment order, the relationship between CZ Pharmacies, comprised of CZ 23 California and CZ Tennessee, and the online app company, CareZone, has become an issue in the 24 case. Dkt. No. 333 at 2-3. Counsel for CZ Pharmacies stated at the hearing: “This is what the 25 dispute is really all about. The pharmacies and CareZone, Inc. are entirely separate entities.” Dkt. 26 No. 328 at 34:23-25. The Court noted that both sides agreed that the corporate family tree in Dkt. 27 No. 333 at 3 accurately stated the relationship between these entities, and that a call option allows 1 Dkt. No. 245-5 at ECF p.79 (CZ Pharmacies). But the parties disagree on the take-aways from 2 this corporate structure. ESI believes that it shows “these CareZone entities work together to mail 3 thousands of prescription drugs to patients across the country.” Dkt. No. 249-3 at 4. CZ 4 Pharmacies says it shows there’s “no corporate overlap. They are entirely separate entities.” Dkt. 5 No. 328 at 34:25-35:1. 6 As both sides have acknowledged, the nature of the corporate relationship goes to the 7 question of whether CZ Pharmacies operated as a mail order business, or purely as a traditional 8 retail storefront. According to CZ Pharmacies, the “only way you get to any conclusion that the 9 pharmacies did anything that’s mailing is by . . . conflating those two [CareZone and CZ 10 Pharmacies] corporate structures together.” Id. at 35:11-14. 11 Whether CZ Pharmacies operated as a mail order business is potentially crucial to the 12 parties’ claims and defenses. CZ Pharmacies’ case is premised in large part on the proposition 13 that it was not a mail order operation, and that ESI improperly terminated its contract after 14 painting it as one. See, e.g., Dkt. No. 24 ¶¶ 58, 90-92 (allegations in complaint). It is undisputed 15 CZ Pharmacies’ provider agreements with ESI specifically excluded “mail order . . . provider 16 types.” Dkt. No. 249-19 §§ 1.4, 1.8 (CZ California); Dkt. No. 249-20 §§ 1.4, 1.8 (CZ Tennessee). 17 CZ Pharmacies has argued from the beginning of this case that this provision was not violated 18 because CareZone is “a separate company that acts as an agent for patients,” to whom the 19 pharmacies dispense medications. Dkt. No. 24 ¶ 20; see also Dkt. No. 273-4 at 2 (opposition to 20 summary judgment). 21 Ms. Snow’s damages opinions appear to be at odds with these representations, which are 22 essential to CZ Pharmacies’ claims. She describes CareZone’s $200 option to purchase the 23 pharmacies as constituting “a derivative ownership structure.” Dkt. No. 245-5 ¶ 29. This directly 24 contradicts arguments that CZ Pharmacies made throughout its liability case. See, e.g., Dkt. 25 No. 273-4 at 15 (denying actual malice standard applies for defamation because “the evidence ESI 26 cites does not show the Pharmacies -- separate legal entities with separate ownership from 27 CareZone Inc. -- did anything” (emphasis in original)). 1 Ms. Snow’s identification of CareZone with CZ Pharmacies is a fundamental part of her 2 damages opinions. Under her income approach, for example, she calculates the value of a 3 business based on the value of the cash flows the business can be expected to generate in the 4 future. Dkt. No. 245-5 ¶ 64. The discounted cash flow analysis for Ms. Snow’s income approach 5 valuation assumed that CZ Pharmacies made up 95.71% of revenues for the entire CareZone 6 group. Dkt. No. 245-5 at ECF p.74; see also Dkt. No. 265-7 ¶ 23 (assumptions used for 7 discounted cash flow analysis provide basis for lost profits approach). Similarly, when Ms. Snow 8 undertook market-based valuation approaches, she again began with the value of the entire group 9 of CareZone-affiliated entities. She stated that “CareZone Pharmacy represents approximately 10 95% of CareZone revenues from 2015 to 2017. For this reason, I have applied a 95% pro rata 11 adjustment to CareZone valuations to arrive at the valuation of CareZone Pharmacy.” Dkt. 12 No. 245-5 ¶¶ 103, 106; id. at ECF p.73. 13 CZ Pharmacies’ effort to explain away this apparent contradiction is not reassuring. It says 14 that “the Pharmacies’ financial statements are maintained on a consolidated basis with a number of 15 CareZone-affiliated entities, but are easily segregated out.” Dkt. No. 265-4 at 11; see also Dkt. 16 No. 328 at 59:9-10 (“she has isolated the value of pharmacies by itself”). That may be true, but 17 Ms. Snow repeatedly stated that she applied an across-the-board 95% adjustment to “CareZone 18 valuations to arrive at the valuation of CareZone Pharmacy.” Dkt. No. 245-5 ¶¶ 103, 106; id. 19 at ECF p.73. 20 In addition, Ms. Snow removed from her income approach valuation “certain line items, 21 including . . . .marketing and advertising expense,” that she decided should be borne in whole or 22 part by CareZone. Dkt. No. 245-5 ¶ 81; id. at ECF pp.79-84 (no marketing costs in income 23 approach analysis). The suggestion that CareZone bears the burden of certain line items for CZ 24 Pharmacies again seems incompatible with the notion that they are separate entities. It also leads 25 to the rather expedient conclusion that CZ Pharmacies gets a percentage of all of CareZone’s 26 revenues without bearing the cost of generating those revenues. 27 When the Court raised these and similar issues at oral argument, counsel for CZ 1 pharmacies.” Dkt. No. 328 at 57:23-24. Counsel for CZ Pharmacies also said that because 2 CareZone has an option on the pharmacies, “if pharmacies’ revenues go up, CareZone value goes 3 up.” Id. at 62:11-12. Ms. Snow drew a much more direct connection, and stated that “CareZone 4 Pharmacy is the largest component, on a revenue basis, of the affiliated CareZone entities 5 representing 95.6% of all revenues across all entities.” Dkt. No. 245-5 ¶ 31. Ms. Snow said in 6 effect that when CZ Pharmacies’ revenue goes up, CareZone’s revenues go up because the 7 pharmacies are a part of CareZone. Dkt. No. 245-5 ¶ 103. In her supplemental report, Ms. Snow 8 vigorously defended herself against ESI’s effort “to undermine my conclusion that CareZone 9 Pharmacy is 95% of CareZone Inc.” Dkt. No. 265-7 ¶ 18. 10 Consequently, the Court has substantial doubt that Ms. Snow’s opinions fit CZ 11 Pharmacies’ essential allegations against ESI. Ms. Snow should be prepared to address these 12 relevance concerns at the hearing. 13 ESI has raised concerns about some specifics in Ms. Snow’s methodology that will also 14 need to be explored at the hearing. These concerns include the fact that the largest input in Ms. 15 Snow’s but-for valuation of the pharmacies was the purchase of a single mail order pharmacy, 16 PillPack, by Amazon for $721 million. In her supplemental report, Ms. Snow concedes that while 17 “it may be ideal to have ‘five to eight’ transactions, the fact of the matter is that sometimes there 18 doesn’t exist many transactions in the marketplace and what a valuation expert is more concerned 19 with is the quality of the transactions, not the quantity.” Dkt. No. 265-7 ¶ 64. Quality certainly 20 counts, but it is questionable that a reasonable expert would rely on just one transaction for a 21 valuation determination of hundreds of millions of dollars. Ms. Snow did not give a good reason 22 for doing that. In addition, Ms. Snow appears to have selected PillPack and given it great weight 23 based entirely on one online article and the testimony of a CZ Pharmacies witness. Dkt. No. 245-5 24 ¶ 100; Dkt. No. 265-7 ¶ 31. A reasonable expert would not have relied on data that thin and 25 biased. See Samuels v. Holland Am. Line-USA Inc., 656 F.3d 948, 953 (9th Cir. 2011) (affirming 26 exclusion of expert declaration based on “little more than a quick internet search . . . and a few 27 telephone calls”); see also Crowley v. Epicept Corp., 883 F.3d 739, 745 (9th Cir. 2018) 1 Ms. Snow’s inferred valuation approach is also questionable. There is no evidence that it 2 has been generally accepted or used by experts in the field, which cuts against admissibility. See 3 Kumho Tire Co. v. Carmichael, 526 U.S. 137, 157 (1999). And it appears to be based almost 4 entirely on CareZone marketing materials -- a Series D venture capital pitch deck. Dkt. No. 245-5 5 ¶¶ 105-106; Dkt. No. 265-7 ¶ 58 (“Then after review of investor presentations and discussions 6 with CareZone, I determined the expected capital raise in the Series D round”). In response to 7 ESI’s challenges, Ms. Snow said that, while it “may not be a traditional market approach, it does 8 rely on transaction information from companies in a comparable investor round, and prior 9 transactions of CareZone in their previous equity rounds, therefore relying on market data to 10 calculate a value.” Dkt. No. 265-7 ¶ 60. That a method uses market data is not enough to make it 11 reliable. “Trained experts commonly extrapolate from existing data. But nothing in either 12 Daubert or the Federal Rules of Evidence requires a district court to admit opinion evidence that is 13 connected to existing data only by the ipse dixit of the expert.” General Elec. Co. v. Joiner, 522 14 U.S. 136, 146 (1997). Ms. Snow agreed at her deposition that she had not cited any materials that 15 support the inferred valuation approach as being an approach that experts in the field of business 16 valuation use. Dkt. No. 245-15 at ECF p.32. It also appears Ms. Snow developed the inferred 17 valuation approach for this litigation. See Dkt. No. 265-7 ¶¶ 26, 56. That is a “very significant 18 fact” that cuts against a finding that the method “comports with the dictates of good science.” 19 Murray, 870 F.3d at 923 (quoting Daubert II, 43 F.3d at 1317). 20 For the “Damodaran multiples” of price/sales and EV/Sales, and public comps, Ms. Snow 21 provided virtually no explanation of how she determined these values. There was no apparent 22 method here, which points to exclusion. See Ellis v. Costco Wholesale Corp., 657 F.3d 970, 982 23 (9th Cir. 2011). Ms. Snow merely posited that she had completed a “fulsome valuation analysis” 24 for public comps without explaining what that might have been. Dkt. No. 245-5 ¶ 92. So too for 25 the relative valuation multiples calculation. She presented her conclusion that “CareZone was not 26 a ‘pure play’ and is instead a hybrid model across industries.” Id. ¶ 104. Why or how this was so 27 was left unsaid. 1 Ms. Snow’s discussion of her combination of these valuation measures was as opaque as 2 its components. In the supplemental report, she gave a valuation range of $670 million to 3 $769 million for the CZ Pharmacies, which informed her conclusion that ESI’s termination caused 4 damages of $436 million to $535 million. Dkt. No. 265-7 ¶ 72. She obtained these values by 5 weighting the past transaction (PillPack) at 45%, the inferred valuation at 20%, the income 6 approach at 20%, Damodaran multiplies (price/sales) at 5%, Damodaran multiples (EV/sales) at 7 5%, and public comps at 5%. Dkt. No. 265-7 at ECF p.34. Why any of these methods are 8 assigned these weights is not explained in the original report. At her deposition, Ms. Snow stated, 9 “Any valuation expert knows that weighting decisions are an exercise in professional judgment, 10 and that’s what I’ve done here. I didn’t think that it needed further explanation in the report.” 11 Dkt. No. 245-15 at ECF p.46; see also Dkt. No. 265-7 ¶ 30. That is dangerously close to an expert 12 magically drawing opinions out of a black box. “Rather than spelling out the steps she took to go 13 from the data to . . . [damages estimate, Ms. Snow] cites her ‘experience’ -- an abstraction not 14 visible to the eyes of the Court, the jury, and opposing counsel, or testable in the crucible of cross- 15 examination.” Open Text S.A. v. Box, Inc., Case No. 13-cv-04910-JD, 2015 WL 349197, at *6 16 (N.D. Cal. Jan. 23, 2015) (citing General Elec. Co., 522 U.S. at 146). 17 Ms. Snow’s lost profits method is problematic, too. The initial report says only that where 18 “I have made assumptions, I have chosen the most conservative or most consistent input.” Dkt. 19 No. 245-5 ¶ 109. The supplemental report made this utter lack of explanation even worse by 20 declaring that further detail “would have simply been redundant.” Dkt. No. 265-7 ¶ 51. This is 21 indicative of a witness hiding the ball. See Samuels, 656 F.3d at 953. 22 The remainder of ESI’s objections to Ms. Snow’s opinions go to their weight and not 23 admissibility. For example, ESI says she ignored in the income approach analysis a number of 24 events that caused CZ Pharmacies’ loss of income, including other PBMs terminating the 25 pharmacies or reducing their price schedule. Dkt. No. 245-4 at 1-2. ESI also says that it cannot be 26 liable for all the damages calculated by Ms. Snow because it invited CZ Pharmacies to apply to be 27 a mail order pharmacy for Medicare Part D, and Medicare and Medicaid make up 65% of the 1 not the model itself, and so go to the weight rather than admissibility of her testimony. See Alaska 2 Rent-A-Car, Inc. v. Avis Budget Grp., Inc., 738 F.3d 960, 968-70 (9th Cir. 2013). “The focus of 3 the district court’s analysis must be solely on principles and methodology, not on the conclusions 4 that they generate, and the court’s task is to analyze not what the experts say, but what basis they 5 have for saying it.” Grodzitsky v. Am. Honda Motor Co., Inc., 957 F.3d 979, 984-85 (9th Cir. 6 2020) (internal quotation and citation omitted). 7 The Court would like to hear directly from Ms. Snow on the relevance and reliability 8 issues detailed above. The parties are directed to propose by August 24, 2020, a few dates after 9 September 14, 2020, for a hearing. As the sponsoring party carrying the burden of admissibility, 10 CZ Pharmacies will put on a direct examination of Ms. Snow on these topics, followed by cross- 11 examination by ESI. The examinations and testimony are to be sharply focused on the concerns 12 raised here. Ms. Snow’s testimony is strictly limited to the work she has already done, and the 13 opinions she has expressed. The hearing will not be an opportunity for CZ Pharmacies to amend, 14 supplement, revise, or edit Ms. Snow’s work under the guise of addressing the Court’s concerns. 15 CZ Pharmacies’ counsel should be prepared to identify the exact sources of Ms. Snow’s testimony 16 at the hearing, either in her reports or deposition testimony. No new declarations or reports of any 17 sort may be filed by either side. 18 C. Motion to Strike (Dkt. No. 303) 19 ESI’s motion, Dkt. No. 303, to strike declarations by Ms. Snow and Jonathan Schwartz 20 attached to CZ Pharmacies’ opposition to the Daubert motion is granted in part and denied in part. 21 The Court found the motion to be suitable for decision on the papers pursuant to Civil Local 22 Rule 7-1(b). Dkt. No. 333 at 1. 23 Ms. Snow’s supplemental expert report is authorized by the expert’s duty to supplement. 24 Fed. R. Civ. P. 26(a)(2)(E). The request to strike it is denied. 25 The declaration of counterclaim-defendant Schwartz was produced nearly three months 26 after the close of fact discovery, and was not authorized or required like Ms. Snow’s. CZ 27 Pharmacies’ suggestion that the declaration was proper because ESI did not depose him on certain 1 burden of proving his case, including the amount of damages.” Tourgeman v. Nelson & Kennard, 2 900 F.3d 1105, 1109 (9th Cir. 2018) (alteration, internal quotation, and citation omitted). As the 3 Court emphasized at the November 8, 2019 discovery hearing, nearly a month before the 4 declaration was filed, “if 1t wasn’t produced, it will not come into evidence.” Dkt. No. 237 5 at 45:18-19. Schwartz’s late declaration is stricken. CZ Pharmacies’ opposition to the motion to 6 strike indicates that Schwartz’s declaration adds no new factual information, so the effect of 7 striking the declaration is minimal. Dkt. No. 312-4 at 12-13. 8 || IV. ES?S DEVELOPMENTS LETTER (DKT. NO. 332) 9 On July 20, 2020, ESI filed a letter requesting a status conference to discuss reports of the 10 || purchase of CareZone assets for $200 million, and additional discovery with respect to that. The 11 parties are directed to meet and confer on the scope of the discovery, and propose a joint plan for 12 || the Court to consider. The plan should be filed by August 24, 2020. 13 CONCLUSION 14 CZ Pharmacies’ motions to exclude the expert testimony of Dr. Wooten and Mr. Kvancz 3 15 are granted in part and denied in part. ESI’s motion to exclude the expert testimony of Dr. a 16 || Hillblom and Mr. Mazzoni is granted in part and denied in part. The motion to strike Ms. Snow’s 3 17 supplemental expert report is denied. Schwartz’s untimely declaration is stricken. The parties will 18 || propose dates after September 14, 2020, for Ms. Snow’s Daubert hearing, as described in this 19 order, by August 24, 2020. The parties will file a joint proposed discovery plan relating to the 20 || reports of the sale of CareZone assets, also by August 24, 2020. 21 IT IS SO ORDERED. 22 Dated: August 5, 2020 23 24 JAME# DONATO 25 United States District Judge 26 27 28