IN RE: NAVIDEA BIOPHARMACEUTICALS LITIGATION

Background

Navidea Biopharmaceuticals, Inc. sued Dr. Michael Goldberg for breach of contract, breach of the duty of good faith and fair dealing, breach of fiduciary duty, and a declaration of the parties’ contractual rights and obligations. Goldberg asserted counterclaims against Navidea and claims against Macrophage Therapeutics, Inc., a Navidea subsidiary. The court had previously dismissed Navidea’s fiduciary-duty claim and determined that Goldberg was entitled to attorneys’ fees for defending that claim.

The pending motions concerned proposed expert testimony. Goldberg offered Terry L. Orr to discuss Regulation D of the Securities Act of 1933, restrictions and legends on Navidea shares, the August 14, 2018 separation agreement, and damages. Orr calculated possible damages based on Navidea shares that Goldberg claimed he should have received and on allegedly missing Macrophage shares. The company offered William F. Murray as a rebuttal expert. Murray proposed applying a discount for lack of marketability to account for the difficulty of selling a large block of thinly traded Navidea shares without affecting the share price.

Legal standard

Federal Rule of Evidence 702 permits qualified experts to testify when their specialized knowledge would help the fact-finder, their opinions are based on sufficient facts or data, their methods are reliable, and they reliably applied those methods to the case. The court acts as the gatekeeper for expert testimony. An expert may explain facts and industry practices but may not tell the jury what legal result to reach or interpret a contract for the court or jury.

Orr’s qualifications and permitted testimony

The court found Orr qualified, although only after a close review, to testify about the characteristics of shares issued under Regulation D, typical restrictive legends, the process for removing those legends, and one method for calculating damages. Orr’s accounting, auditing, education, and experience with financial statements and Securities and Exchange Commission filings supported that limited qualification.

The court barred Orr from giving legal opinions about Regulation D, Rule 144, or Form S-8; whether Goldberg was a control person; whether Navidea complied with securities regulations; whether particular legends were authorized or required; whether Navidea breached the August Agreement; or what that agreement required. Orr also could not interpret the agreement or testify that it should have contained typical stock-split language. Those subjects involved legal conclusions or factual conclusions reserved for the court or jury.

Orr’s Navidea-share damages opinions

The court excluded Orr’s pre-reverse-split method. Orr’s own analysis assumed that the shares could not be traded until after Navidea’s April 26, 2019 reverse stock split, so valuing 23.5 million pre-split shares was irrelevant to the damages calculation.

The court also excluded Orr’s method based on the highest Navidea share price during a period in 2020 and his alternative method using the September 28, 2021 share price. Delaware law, as described by the court, measures damages for improperly restricted shares using the highest intermediate price during a reasonable period after the restriction began, rather than assuming that the holder could sell all shares at a later peak price. Orr’s analysis did not establish a basis for treating the period through August 3, 2020 as a reasonable selling period for all three tranches of shares.

The court allowed Orr’s calculation using the share price on the earliest possible date each tranche could have been sold. That calculation was consistent with the damages framework the court applied. The court also ruled that Murray’s proposed blockage or marketability discount went to the weight of Orr’s admissible analysis, rather than its admissibility.

Orr’s Macrophage-share damages opinion

The court excluded Orr’s opinion concerning damages for the alleged failure to issue Macrophage shares. Orr’s valuation relied on several assumptions about potential investors’ proposed $25 million investment, the percentage of Macrophage they might have received, Navidea’s intended control of Macrophage, and the value of super-voting shares. Orr did not quantify the additional value of the super-voting shares and did not provide a specific calculation that would assist the jury. The court characterized this opinion as speculative and inadmissible.

Murray’s rebuttal testimony

The court denied Goldberg’s motion to exclude Murray’s rebuttal testimony. Murray used a private-placement model and a peer-reviewed study to estimate a discount for the lack of marketability of a large block of Navidea shares. The court found that Goldberg’s challenges to the model, its assumption about trading volume, and its failure to focus separately on Navidea’s trading history concerned the testimony’s weight, not its admissibility. Those issues could be addressed through cross-examination.

Murray’s testimony was limited to rebutting the portions of Orr’s opinion that remained admissible. The court noted that Murray could not be used as an affirmative damages expert if he had not been timely disclosed for that purpose.

Disposition

The company’s motion to exclude Terry L. Orr as an expert witness was granted in part. Goldberg’s motion to exclude William F. Murray was denied. The parties were ordered to meet and confer and submit a joint letter proposing next steps by November 18, 2022. The opinion decided the admissibility of expert evidence; it did not decide the underlying contract claims or the amount of any damages.