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US Salt, Inc. v. Broken Arrow

April 20, 2009


Appeals from the United States District Court for the District of Minnesota.

The opinion of the court was delivered by: Murphy, Circuit Judge

Submitted: March 12, 2009

Before MURPHY, MELLOY, and SHEPHERD, Circuit Judges.

US Salt, Inc. (US Salt) filed this breach of contract action in Minnesota state court against Broken Arrow, Inc. (Broken Arrow), which subsequently removed the case to federal court on the basis of diversity jurisdiction. The district court*fn1 granted US Salt partial summary judgment on its breach of contract claim but ultimately dismissed the claim for failure to submit admissible evidence to prove damages. US Salt appeals the district court's dismissal, and Broken Arrow has filed a cross appeal to challenge the district court's grant of partial summary judgment. We affirm.

Since 1982 Thomas Johnson has been President of US Salt. According to Johnson, US Salt has not been in the water conditioning business since the mid to late 1980s. For several years Johnson had sought to re-enter the water conditioning business, but he had not been able to locate a high quality source of washed and dried extra coarse solar salt to be used in water conditioners. In 2003 Johnson received a solicitation letter from Broken Arrow, along with a sample of the extra coarse salt it intended to sell to US Salt.

In June 2004 US Salt entered into a contract to purchase a minimum of 15,000 tons of solar salt annually from Broken Arrow. The parties agreed that the duration of the contract would span July 1, 2004 through December 31, 2007, and that the price of the salt would remain $20 per ton until January 1, 2007. The different grades of salt that were available for purchase under the contract included extra coarse, coarse, medium, and fine. After the contract was signed, US Salt informed Broken Arrow that it only wanted to purchase extra coarse salt. Following several disputes, Broken Arrow stopped selling salt to US Salt in August 2005.

US Salt filed this action in state court, alleging breach of contract. Broken Arrow removed the case to federal court on diversity grounds, and US Salt moved for summary judgment. The district court granted partial summary judgment to US Salt, concluding as a matter of law that the contract was enforceable and Broken Arrow had breached the agreement. The court noted that the issue of any damages would be presented to the jury.

During discovery, US Salt retained the services of a financial and accounting expert, Arthur Cobb, to testify as to US Salt's lost profits resulting from Broken Arrow's breach of the contract. Cobb submitted two reports to support US Salt's damages claim. In Cobb's first report, prepared in October 2007, he opined that US Salt had suffered approximately $1,800,000 in damages for lost profits and rail car lease costs. At Cobb's first deposition, he admitted that he had started his analysis only two to three days before his report was filed; that the primary factual bases for his first report were the assumptions and estimates he was provided by Johnson; and that he did not do any independent analysis of the local salt market. A few days later, Cobb filed a supplemental report adjusting his opinion to be that US Salt had suffered damages in the range of $677,000 to $1,060,000. This report included more factual assumptions provided by Johnson. At his second deposition, Cobb testified that he had not performed any independent research to confirm the accuracy of Johnson's estimates and assumptions other than reviewing the deposition testimony of US Salt's customer, Gary Capone of Surge Water Conditioning.

At Johnson's deposition, he identified Capone as a customer who had given him "different estimates" as to the volume of salt he expected to buy from US Salt; however, Johnson admitted that there was no way of verifying those estimates "until [he] started bagging." Johnson also testified that he was not able to obtain a written commitment from any customer regarding how much they would pay for solar salt.

During a pretrial hearing held on April 24, 2008, the district court granted Broken Arrow's motion to exclude Cobb from testifying at trial, concluding Cobb's expert testimony was not sufficiently reliable under Federal Rule of Evidence 702. The court pointed out that Cobb's conclusions, such as his lost profits estimates, were inconsistent and that in reaching his conclusions, Cobb had conducted no analysis of the Minnesota salt market and had relied "almost exclusively"--and without verification--on Johnson's unsupported assumptions and estimates. The court also excluded Johnson's proposed testimony with respect to US Salt's lost profits because "his assumptions and estimates as to US Salt's expected sales were nothing more than optimistic projections." The court noted that Cobb's reliance on Johnson's estimates was a "house built on a very shaky foundation."

After the court's evidentiary rulings left US Salt with little or no evidence of lost profits, the court directed US Salt to provide a summary of what damages, if any, remained for trial. US Salt submitted an itemized list of new damages to the court that had never been previously disclosed to Broken Arrow. Broken Arrow then moved to exclude the evidence as unfairly prejudicial. Ultimately the court held that US Salt's failure to disclose these new damages prior to trial was neither substantially justified nor harmless. Accordingly, the court dismissed US Salt's breach of contract claim for failure to submit admissible evidence to prove damages.

On appeal US Salt argues that the district court erred in excluding the expert testimony of Cobb and the lay opinion testimony of Johnson regarding lost profits. Broken Arrow cross appeals the district court's summary judgment rulings that held the contract was enforceable and Broken Arrow had breached the contract.

A district court's order prohibiting the admission of lay opinion or expert testimony is reviewed for an abuse of discretion. In re Air Crash at Little Rock Ark., on June 1, 1999, 291 F.3d 503, 509 (8th Cir. 2002). A district court enjoys "wide discretion in ruling on the admissibility of proffered evidence," Harris v. Sec'y, U.S. Dep't of the Army, 119 F.3d 1313, 1321 (8th Cir. 1997), and evidentiary rulings should only be overturned if there was a "clear and prejudicial abuse of discretion," Haynes v. Am. Motors Corp., 691 F.2d 1268, 1272 (8th Cir. 1982).

US Salt first argues that Johnson as president of US Salt is qualified to provide lay opinion testimony as to lost profits because of his unique understanding of US Salt's operations and finances. Broken Arrow argues that Johnson's proposed testimony is too speculative to justify a damage award since it was based on optimistic projections for an unproven enterprise. Federal Rule of Evidence 701 provides that if a witness is not testifying as an expert, then any testimony by the witness expressing his or her opinion or inferences is limited to those that are rationally based on the witness's perception and helpful to understanding the witness's testimony or determining a fact in issue. A witness may provide lay opinion testimony "about facts within his or her range of generalized knowledge, experience, and perception." United States v. ...

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