Pacific Steel Group v. Commercial Metals Company

Background

The court considered three motions by Commercial Metals Company and its subsidiaries, collectively called CMC, to exclude expert witnesses, and Pacific Steel Group’s motion to strike an expert filing by CMC’s expert Ramsey Shehadeh. The court applied Federal Rule of Evidence 702, which permits qualified experts to testify when their specialized knowledge will help the factfinder, their opinions are based on sufficient facts or data, and their principles, methods, and application of those methods are reliable.

Theodore Griswold

CMC argued that Theodore Griswold was not qualified to testify about regulatory requirements for constructing a steel mill because he had not worked on obtaining permits for a minimill or rebar mill. CMC also argued that his extensive relationship with Pacific Steel showed bias. The court found Griswold qualified to testify about obtaining regulatory clearance for a large industrial project because of his more than 30 years of experience as an environmental attorney, including work involving project approvals, permits, and industrial projects. The court said his lack of experience with minimills went to the weight of his testimony, rather than its admissibility. It likewise concluded that any bias affected credibility, which could be evaluated by the jury, rather than his competency to testify.

The court therefore found Griswold qualified to testify about the regulatory steps Pacific Steel would need to take to secure a mill in the greater Los Angeles Basin. However, the court stated that, to the extent Griswold refused to answer deposition questions about certain subjects, he would be precluded from testifying about those subjects. The court also found that CMC had not shown that Griswold selectively disclosed attorney opinions or generally waived attorney-client privilege.

Dominick DeSalvo and John Stanich

DeSalvo and Stanich submitted a joint report stating that CMC blocked Pacific Steel from entering a binding contract with Danieli for a MiDa micro mill for 487 days. They attributed to that delay at least $17,985,961 in increased labor, material, equipment, and service costs. They also opined that qualified, experienced alternative contractors were unavailable and that using inexperienced contractors would cause additional financial losses.

CMC argued that the 487-day delay opinion was disconnected from the facts because Pacific Steel performed some preconstruction work during that period. The court concluded that the experts’ report addressed the delay to the project’s critical path, even though some preconstruction activity could continue. It treated CMC’s argument as a challenge suitable for cross-examination rather than a basis to exclude the testimony.

CMC separately challenged the damages calculation, including the use of a uniform $100-per-hour labor rate for seven construction specialties. The court again found that the criticism concerned the weight of the opinion, not its admissibility. As to the availability of contractors, the court found an adequate basis because the experts represented that they researched steel-mill projects, contractor availability, material costs, union labor rates, and contractor quotations received by Pacific Steel. The court said CMC could test their assumptions through cross-examination.

DeSalvo and Stanich also estimated that using inexperienced contractors would cost at least 11 percent more than using experienced contractors. They relied on their industry experience and learning-curve theory, which concerns efficiency gains from repeated performance of tasks. CMC argued that applying a 90 percent learning curve was unsupported. The court found sufficient support, including scholarly papers applying learning-curve theory in several industries, including construction. It held that competing evidence and cross-examination, rather than exclusion, were the proper ways to challenge the opinion.

Patrick Kennedy

Pacific Steel’s economist, Patrick Kennedy, offered an opinion that using a non-MiDa mill would place Pacific Steel at a material disadvantage compared with its competitors. His report stated that an alternative mill would have had an earnings capacity approximately $19 million lower per year than a MiDa mill operating at full capacity.

CMC argued that Kennedy did not adequately explain his methods and relied on return on capital employed, or ROCE, a profitability measure that CMC said was not generally accepted for evaluating investments. The court found that Kennedy’s report explained differences in personnel, maintenance, supplies, gas, electrodes, rolling, and melt-shop costs between the MiDa and alternative mills. It also found that he explained how the alternative mill’s financial performance would fall below Pacific Steel’s cost of capital and comparable market-based required returns under a range of historical metal spreads.

The court further found sufficient evidence that ROCE was generally accepted in the relevant community, including evidence that steel companies and other capital-intensive companies used it in investment and profitability decisions. The court concluded that Kennedy adequately explained his methods and that any alleged defects in applying those methods could be addressed through cross-examination.

Pacific Steel’s motion to strike Ramsey Shehadeh’s filing

The scheduling order did not contemplate additional expert filings. After Kennedy submitted a reply report containing new net-present-value, or NPV, and internal-rate-of-return, or IRR, analyses, CMC filed a declaration from Shehadeh addressing those analyses. Pacific Steel argued that the declaration was actually an impermissible expert sur-reply filed after expert discovery closed.

The court agreed that Kennedy’s reply report included significant new analyses that had not appeared in his opening report and that Shehadeh could not have addressed them in his rebuttal report. But the court found Shehadeh’s declaration substantially justified as a matter of basic fairness because it responded to the new analyses. The court therefore denied Pacific Steel’s motion to strike. The court also questioned whether the new analyses in Kennedy’s reply report should themselves be stricken and ordered the parties to submit simultaneous briefs on that issue; the provided opinion text does not include the remainder of that briefing instruction.

Disposition

The court denied CMC’s motions to exclude the expert witnesses, docket numbers 153, 156, and 160. It also denied Pacific Steel’s motion to strike, docket number 205. The order was dated June 25, 2024, and signed by United States District Judge Haywood Gilliam.