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 in the retirement accounts.

Valelly asserted a breach-of-contract claim alleging that Merrill Lynch paid an unreasonable interest rate on cash automatically moved into a Bank of America money market account through Merrill Lynch’s sweep program. She also asserted that Merrill Lynch breached the implied covenant of good faith and fair dealing by failing to treat her accounts as linked, which she alleged would have qualified the cash for a higher interest rate.

Valelly relied on a report from Dr. Micah Officer in support of her motion for class certification. Dr. Officer proposed calculating damages as the difference between the interest investors actually received and the interest they allegedly should have received at a reasonable rate. He also proposed calculating damages for the account-linking claim by comparing the rate paid in the assigned asset tier with the rate that would have applied in a higher tier.

Merrill Lynch’s Motion

Merrill Lynch moved to exclude Dr. Officer’s report and testimony under Federal Rule of Evidence 702 and the standard associated with Daubert v. Merrell Dow Pharmaceuticals. Under that standard, expert testimony must be based on reliable methods, help the judge or jury decide an issue, and reflect the expert’s reliable application of specialized knowledge.

Merrill Lynch did not challenge Dr. Officer’s qualifications. Its argument was that he supplied a damages formula but did not provide reliable expert analysis explaining how to determine the key input: what interest rate would have been reasonable for the sweep accounts.

Reasonable-Rate Methodologies

The court held that Dr. Officer’s proposed damages formula could serve as a common formula only if there were admissible evidence establishing a reasonable interest rate. The report did not explain what factors a financial institution should consider when setting a reasonable rate or why those factors supported a particular benchmark.

Dr. Officer suggested using Bank of America’s earlier “pass-through” model as a proxy for a reasonable rate. The court found that he did not independently explain why that model produced a reasonable rate; instead, he essentially relied on the fact that Bank of America had previously used the model. The court therefore precluded him from testifying that the pass-through model produced a reasonable rate.

Dr. Officer also suggested using rates for other financial products, including government money market mutual funds, as benchmarks. The court explained that those products differ from bank deposit accounts in how the funds are invested and how their returns are determined. Although the products might present similar default risks from a customer’s perspective, Dr. Officer did not explain why that similarity made their rates appropriate for setting the rate on a bank deposit account. The court therefore found this proposed opinion inadmissible as well.

Statement-Linking Claim

The court separately rejected Dr. Officer’s proposed damages testimony for the account-linking claim. It concluded that the proposed calculation consisted of drawing on figures that would already be in evidence and performing basic arithmetic. Because that calculation did not require specialized knowledge, the testimony would not help the factfinder and was inadmissible.

The court did not decide whether the proposed methodology adequately addressed causation or whether the account-linking claim could satisfy the requirements for class treatment. Those issues remained outside the scope of the expert-exclusion ruling.

Disposition

The court granted Merrill Lynch’s motion to preclude Dr. Officer’s opinion and testimony. The ruling addressed the admissibility of the proposed expert evidence, not the ultimate merits of Valelly’s contract or implied-covenant claims, and the court stated that it was not deciding the pending class-certification motion.

The court also granted the parties’ pending motion to seal, while directing Merrill Lynch to show cause why any portion of the opinion should remain confidential. The court denied the parties’ joint request for oral argument with respect to the expert motion. It directed the parties to propose a briefing schedule for the class-certification motion and Merrill Lynch’s summary-judgment motion and ordered a status conference.