Valelly v. Merrill Lynch, Pierce, Fenner & Smith Incorporated

Background

Sarah Valelly opened a Cash Management Account, a Roth Individual Retirement Account, and a Traditional Individual Retirement Account at Merrill Lynch. The accounts were governed by a Client Relationship Agreement containing a provision requiring Merrill Lynch to pay at least a “reasonable rate” of interest on cash held in Valelly’s retirement accounts. Merrill Lynch’s retirement-account savings program automatically transferred, or “swept,” eligible cash into participating bank accounts, with Bank of America as the primary institution described in the opinion.

Valelly alleges that Merrill Lynch breached the agreement by paying an unreasonable interest rate on swept cash. She also alleges that Merrill Lynch breached the implied duty of good faith and fair dealing by failing to treat her retirement accounts as linked, which she contends would have produced a higher interest rate.

The parties filed motions under Federal Rule of Evidence 702, the rule governing whether expert testimony is sufficiently qualified, reliable, and helpful to the factfinder. Valelly sought to exclude Merrill Lynch’s expert, Dr. Andrea Eisfeldt. Merrill Lynch sought to exclude Merrill Lynch’s opponent’s expert, Dr. Darius Palia, and to strike two later submissions from Palia.

Dr. Eisfeldt’s Testimony

Eisfeldt compared interest rates in Merrill Lynch’s Retirement Asset Savings Program with rates reported for comparable brokerage sweep programs. She relied on data from Crane and considered whether the programs were insured by the Federal Deposit Insurance Corporation, available for retirement accounts, and capable of automatically transferring uninvested cash. She concluded that the Retirement Asset Savings Program rates were generally comparable to rates offered by competing sweep programs.

Valelly argued that Eisfeldt’s testimony should be excluded because Eisfeldt did not offer an ultimate opinion about whether the rates were “reasonable,” relied on Crane’s data, compared the program with products Valelly viewed as inappropriate or incomplete comparators, and equally weighted the program’s asset tiers rather than weighting them according to the amount of cash in each tier.

The court rejected those arguments. It held that Eisfeldt did not need to decide the ultimate question of reasonableness because her comparison of the rates with comparable programs could help the factfinder assess that question. The court also held that challenges to Crane’s data, the selected comparators, and the weighting method concerned the strength of the testimony and could be addressed through cross-examination and contrary evidence, rather than by excluding the testimony.

Dr. Palia’s Testimony

Palia offered opinions that the Retirement Asset Savings Program rates were unreasonable and developed a damages model. His opening report relied in part on rates paid on government money-market mutual funds. The court excluded that portion because it had previously determined that government money-market mutual funds were not appropriate comparators for the insured deposit accounts at issue, and Valelly no longer advocated that methodology.

The court allowed Palia to compare the rates with savings-account rates offered by four online banks. Although Merrill Lynch argued that online savings accounts differed from sweep accounts and that Palia had selected the banks improperly, the court concluded that those issues affected the weight of the testimony rather than its admissibility.

The court also allowed Palia to use two additional comparators introduced in his rebuttal report: rates on money-market deposit accounts offered by Ally and Discover, and data from Informa Research Services concerning rates offered by online banks. The court found that these comparisons responded to Eisfeldt’s opinions about the differences between sweep accounts and other deposit products. Merrill Lynch could challenge the comparisons through cross-examination.

Supplemental Submissions and Disposition

After the opening and rebuttal reports, Palia sent two supplemental submissions by email. One calculated damages using rates from Fidelity and Baird sweep programs; the other calculated damages using online-bank money-market deposit account rates reported by Informa. The submissions were sent after the deadlines and were not accompanied by written expert analysis.

The court held that the submissions were not proper supplementation under the federal expert-disclosure rules. It found that the delay was unjustified, the submissions lacked the required written analysis, and Merrill Lynch was prejudiced because its expert had not been able to address the additional data. The court therefore granted Merrill Lynch’s motion to strike the supplemental submissions.

Judge Valerie Caproni denied Valelly’s motion to exclude Eisfeldt’s opinion and testimony. She granted in part and denied in part Merrill Lynch’s motion to exclude Palia’s opinion and testimony, excluding the money-market-mutual-fund portion while allowing the online-bank savings-account comparison and the two rebuttal comparators. The court separately granted Merrill Lynch’s motion to strike Palia’s supplemental submissions. It directed the parties to submit a proposed schedule for summary-judgment briefing and ordered the opinion to remain under seal while requiring Merrill Lynch to show cause why any portion should remain sealed.