Alaska Rent-a-Car, Inc. v. Avis Budget Group, Inc., 2013 U.S. App. LEXIS 4566 (9th Cir. Mar. 9, 2013):

Several state law questions arise in this appeal, and [two] federal law questions, whether expert testimony should have been excluded under Daubert *** and whether Alaska "English Rule" attorneys fee awards [Alaska Civil Procedure Rule 82] may be awarded in a diversity action where Alaska is the forum state but another state's law governs the dispute. ***

Alaska Rent-A-Car's predecessor began doing business as an Avis licensee in 1956, three years before Alaska attained statehood. Most other Avis licensees had a defined territory in a locality, not an entire state, within which they had the exclusive right to rent cars on behalf of Avis. Avis reasonably considered Alaska different.

In its 1959 agreement, the Alaska Avis licensee was entitled to operate in the "entire State of Alaska," about 20% of the entire United States, but a negligible percentage of the nation's roads. The license was renewed in 1965, this time giving Alaska Rent-A-Car exclusive rights in specific locations within Alaska. A 1976 amendment added additional locations to the license agreement, and gave Alaska Rent-A-Car a right of first refusal for control of any license Avis planned to grant anywhere in Alaska. It also gave Alaska Rent-A-Car the right to expand into new territory, such as temporary camps during the construction of the oil pipeline from Prudhoe Bay to Valdez during the 1974-1977 period. ***

Avis bought a company called Agency Rent-A-Car in 1995. Some of Avis's licensees claimed that Avis was breaching their license agreements by operating another rental car company in their territories. To protect itself against these claims, Avis sued thirteen of its licensees, and sought class certification, to obtain a judgment that its purchase of Agency Rent-A-Car and its changed operations did not violate licensee rights. Avis and named defendants settled in 1997, without ever litigating to class certification or judgment. Our case arises out of that settlement, which allows Avis to purchase additional rental car companies, but requires that "the sales, marketing and reservation activities, operations and personnel of and for the Avis System will not be utilized to market, provide, and/or make available car rental services" for any additional rental car company purchased by Avis. The settlement agreement protected Avis licensees from the risk of Avis using its personnel to steer customers and potential customers towards another brand. Licensees would typically only rent Avis cars, but Avis might own a competitor operating in the same locality under a different name. Avis bought Budget Rent-A-Car out of bankruptcy in 2002. It then restructured its central operations, putting the Avis and Budget marketing teams under unified management, creating a single team to answer calls to both Avis and Budget reservation lines, and combining the Avis and Budget national corporate sales forces. The obvious threat from these actions to Avis's licensees was that Budget would bleed off some of their customers and potential customers. People typically rent cars online or by telephone from a national site or 800 number, and governments and big corporations typically negotiate with the national entity, because they typically rent cars for use away from home.

Alaska Rent-A-Car sued Avis claiming that Avis had indeed breached the settlement agreement, causing Alaska business to be switched to Budget Rent-A-Car, its local competitor. The district court granted a partial summary judgment, establishing that Alaska Rent-A-Car was a party to the settlement agreement, and that Avis had breached the agreement by using the same personnel to sell and market both Avis and Budget cars. Damages were left for jury trial. The jury returned a verdict in favor of Alaska Rent-A-Car for $16 million. Avis appeals. ***

III. Daubert.

Each side put on testimony of an expert witness on damages. Avis objected under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals and its progeny to allowing Alaska-Rent-A-Car's expert to testify.

Before it allowed Alaska Rent-A-Car's expert to testify about his opinion on damages, the court gave Avis the opportunity to conduct a lengthy voir dire to inquire into the facts and data underlying the expert's conclusions. After that voir dire, the court made a Daubert gateway determination. It concluded that "there's enough underlying data and . . . a sufficient causal connection to allow [the expert's] testimony. . . . I think he's qualified to give the testimony. I think his testimony will assist the trier of fact and I think his opinion is the result of reliable principles and methods. . . . [C]learly, [Avis has] areas for cross examination, and that's what it's going to be subject to."

The task, for both sides, was to figure out how much business and how much profit Alaska Rent-A-Car had lost on account of Avis's breach of the settlement agreement. Avis had breached when it bought Budget Rent-A-Car out of bankruptcy in 2002 and then merged much of the two companies' national sales and marketing staffs into one.

As in any damages case, the calculation had to address a hypothetical world that never existed, one in which other things remained the same but the breach had not occurred. To calculate damages from the breach, as opposed to damages from competition, Alaska Rent-A-Car's expert witness compared Avis's and Budget's experience with Alamo-National's (Alamo) experience after Cerberus bought Alamo out of bankruptcy at around the same time. His theory was that Alamo and Budget both got infusions of capital and management enabling them to compete, but differed in that Cerberus did not rent cars through any other company, and Avis did, through Budget. Thus Alamo could not benefit from merging sales and marketing activities because Cerberus had no other car rental company, but Budget could. His assumption was that Budget would have performed much like Alamo but for the benefit of a unified Avis-Budget sales and marketing effort.

Budget rebounded much faster than Alamo. The witness in effect treated the faster rebound of Budget as attributable to the breach of the settlement agreement. He used Alamo's national rate of rebound as a rough approximation of how Budget, had it not had the benefit of the breach, would have performed in Alaska. He then projected how much market share Budget gained each year due to the breach. He testified that he used Alamo's national rate of rebound as an approximation for how Budget in Alaska would have performed. He reasoned that the rental car market is a national market, and that national rebound rates would not be skewed by idiosyncratic local factors.

According to Alaska Rent-A-Car's witness, Alamo's national market share dropped 35% after it went into bankruptcy, slowly recovering after Cerberus bought it. Budget was in bankruptcy a shorter time, and recovered faster after Avis bought it. The witness, saying that he wanted to be conservative in his estimates, assumed that Budget would have lost 32.5% of its market share (slightly less than Alamo) had Avis bought it out of bankruptcy but not breached the settlement agreement.

Because the revitalized Budget would draw customers from other car rental companies too, not just Avis, the witness picked the Juneau airport to approximate how much of the bite would come out of Alaska Rent-A-Car. Juneau had the advantage of simplicity, because he could examine a market before Budget entered and after Budget entered, to approximate how much business it took from Alaska-Rent-A-Car. Over the first three years of its entry into the Juneau market, Budget got an average of 23.3% of the Juneau rental car market. About 48% of that market share gain came from Alaska Rent-A-Car customers, 52% from Hertz and other competitors. So to get a statewide figure, the witness made the assumption that after the breach, Budget got about half its customers from Alaska Rent-A-Car statewide. He calculated Budget's market share after the bankruptcy, assumed that but for the breach Budget's rate of market share recovery would have been similar to Alamo's national rate of recovery, and assumed that about half of its faster recovery came at the expense of Alaska Rent-A-Car. These assumptions and inferences generated lost profits calculations of $4.079 million from 2003 to 2008 due to the breach, and future lost profits, discounted to present value, of $11.708 million.

Avis challenges the expert's assumptions and comparisons. It argues that differences between Alamo and Budget, such as the much longer duration of Alamo's bankruptcy, and many other factors, made Alamo an invalid comparison. Avis also argues that applying a national market share comparison to Alaska overlooked very significant differences in how the national and Alaska markets worked. And it argues that Alaska Rent-A-Car's extrapolation from the Juneau market experience ignored the differences between this small market, only 5% of the statewide rental car market, and the market elsewhere in the state, where roads connected towns (unlike Juneau), and doing business more often required a rental car. Of course, Alaska Rent-A-Car's expert gave reasons for his use of all these comparisons, such as by pointing out the clarity with which the Juneau market could be examined. Because Budget entered Juneau in 2000, Juneau could clearly show how much business Budget took from Avis there.

All of Avis's challenges to Alaska Rent-A-Car's expert are colorable, but none go to admissibility. They amount to impeachment. Under Federal Rule of Evidence 702 the trial court may exercise discretion to allow expert testimony if the testimony "will assist the trier of fact to understand the evidence or to determine a fact in issue;" (1) it is "based upon sufficient facts or data;" (2) it is "the product of reliable principles and methods;" and (3) the expert "has applied the principles and methods reliably to the facts of the case." This list of requirements makes the task of determining admissibility sound more mechanical and less judgmental than it really is. Under Daubert v. Merrell Dow Pharmaceuticals and its progeny,

[T]he court must assess [an expert's] reasoning or methodology, using as appropriate such criteria as testability, publication in peer reviewed literature, and general acceptance, but the inquiry is a flexible one. Shaky but admissible evidence is to be attacked by cross examination, contrary evidence, and attention to the burden of proof, not exclusion. In sum, the trial court must assure that the expert testimony "both rests on a reliable foundation and is relevant to the task at hand." [Primiano v. Cook, 598 F.3d 558, 564 (9th Cir. 2010) (quoting Daubert, 509 U.S. at 597) (footnotes and citations omitted).]

"Expert opinion testimony is relevant if the knowledge underlying it has a valid connection to the pertinent inquiry. And it is reliable if the knowledge underlying it has a reliable basis in the knowledge and experience of the relevant discipline." [Id. at 565 (quoting United States v. Sandoval-Mendoza, 472 F.3d 645, 654 (9th Cir. 2006)).]

The Daubert reliability requirement "is flexible" and "Daubert's list of specific factors neither necessarily nor exclusively applies to all experts or in every case." [Kumho Tire Co. Ltd. v. Carmichael, 526 U.S. 137, 141 (1999).] "The 'list of factors was meant to be helpful, not definitive' and the trial court has discretion to decide how to test an expert's reliability as well as whether the testimony is reliable, based on 'the particular circumstances of the particular case.'" [Primiano, 598 F.3d at 564 (quoting Kumho Tire, 526 U.S. at 151, 150).]

Basically, the judge is supposed to screen the jury from unreliable nonsense opinions, but not exclude opinions merely because they are impeachable. The district court is not tasked with deciding whether the expert is right or wrong, just whether his testimony has substance such that it would be helpful to a jury. Avis does not challenge Alaska Rent-A-Car's expert's credentials and qualifications. Nor does it challenge his general methodology, comparing the unknown to an analogous known experience. Instead, Avis challenges three aspects of the witnesses testimony: using Alamo as the comparator, using the national rather than the Alaska market as a baseline, and extrapolating from the Juneau market to the entire Alaska market. None of these challenges make the district judge's decision to admit the testimony an abuse of discretion. They all go to the weight of the testimony and its credibility, not its admissibility. Avis gave the jury good arguments for rejecting the testimony, but the district court did not abuse its discretion by allowing the jury to listen to Alaska Rent-A-Car's expert as well as Avis's. "Given that the judge is 'a gatekeeper, not a fact finder,' the gate could not be closed to this relevant opinion offered with sufficient foundation by one qualified to give it." [Id. at 568 (quoting Sandoval-Mendoza, 472 F.3d at 654).] ***

V. Attorney's Fees

Alaska has, since Congress applied the general laws of Oregon to the Territory of Alaska in 1884, followed the English Rule rather than the American Rule on attorney's fees. Alaska is the only state that follows the English Rule, that the prevailing party is generally entitled to an attorney's fees award, though many federal and state statutes provide for awards in designated circumstances. Though sometimes criticized, the rule remains robustly in force.

Present Alaska practice is set out in Alaska Rule of Civil Procedure 82, which generally requires the award of attorney's fees to the prevailing party in civil cases. The Alaska Supreme Court has promulgated Rule 82 pursuant to its constitutional authority to "make and promulgate rules governing practice and procedure in civil and criminal cases in all courts."

The United States District Court for the District of Alaska has itself for many years treated Alaska Rule 82 as generally applicable in civil proceedings where federal law did not provide otherwise. The district court followed its usual practice in this case, awarding $1,605,000 in attorney's fees based upon the Rule 82 formula. As the district court held in Ryan v. Sea Air, "Alaska follows the English Rule, by virtue of which the prevailing party always recovers a portion of its fees from the losing party," and the United States District Court treats this Alaska practice as "binding in diversity cases" brought there. Ryan cites our 1979 decision in Klopfenstein v. Pargeter, in which we upheld an Alaska Rule 82 attorney's fees award in a diversity case, because "[i]n a diversity action the question of attorneys fees is governed by state law."

Two issues arise in this case. First, should federal law or state law apply to an attorney's fees award? Second, if state law applies, should Alaska law or New York law control?

The first question is easily answered. As both parties agree, state law applies. The Supreme Court held in Alyeska Pipeline Service Co. v. Wilderness Society [421 U.S. 240 (1975)] that for Erie Railroad Co. v. Tompkins purposes, state law on attorney's fees is substantive, so state law applies in diversity cases. "[I]n an ordinary diversity case where the state law does not run counter to a valid federal statute or rule of court, and usually it will not, state law denying the right to attorney's fees or giving a right thereto, which reflects a substantial policy of the state, should be followed." We have of course said the same thing.

The second question, Alaska law or New York law, is more intricate. The rule is that the federal court in which the case is litigated should apply the forum state's choice of law rules. The parties agree that Alaska choice of law rules apply.

Though federal law establishes that attorney's fees law is substantive for Erie purposes, it is not necessarily substantive for choice of law purposes.

Footnote 55. See, e.g., Guaranty Trust Co. of New York v. York, 326 U.S. 99, 108-10 (1945); Sun Oil Co. v. Wortman, 486 U.S. 717, 726 (1988) ("Guaranty Trust itself rejects the notion that there is an equivalence between what is substantive under the Erie doctrine and what is substantive for purposes of conflict of laws.").

Whether it is substantive or procedural for choice of law purposes depends on how the Supreme Court of the forum state would characterize it. Some state Supreme Courts consider their rules governing attorneys fees to be procedural for choice of law purposes.

Footnote 56. See, e.g., Kirwan v. Chicago Title Ins. Co., 624 N.W.2d 644, 653 (Neb. 2001) (applying a Nebraska statue on attorney's fees in insurance actions, despite the fact that South Dakota law governed the underlying dispute, because Nebraska deems its attorney's fees statute to be procedural); North Bergen Rex Transport, Inc. v. Trailer Leasing Co., 730 A.2d 843, 848 (N.J. 1999) (applying New Jersey law on attorney's fees despite the fact that another state's substantive law governed the underlying dispute, because "attorneys' fees are a matter of practice and procedure, rather than of substantive law.").

If the Alaska Supreme Court would consider its attorney's fees rule procedural, then Alaska law, the English Rule, would apply. If, however, the Alaska Supreme Court would consider its attorney's fees rule substantive, then New York law, the American rule, would apply.

And that too is intricate. The Alaska Supreme Court has never held that Alaska Rule of Civil Procedure 82 is procedural for Alaska choice-of-law purposes. However, it has stated in dicta in Ehredt v. DeHavilland that "attorney's fee are not an item of damage," and that it would thus apply Rule 82 even if another state's substantive law applied. [Ehredt v. DeHavilland Aircraft Co. of Canada, Ltd., 705 P.2d 446, 452 n.8 (Alaska 1985) ("Thus, even if we applied Florida law, Civil Rule 82 would control an award of attorney's fees.").] We must follow the considered dicta, as well as the holdings, of the Alaska Supreme Court when applying Alaska law.

Footnote 58. See Aceves v. Allstate Ins. Co., 68 F.3d 1160, 1164 (9th Cir. 1995) ("The district court, like us, is bound to follow the considered dicta as well as the holdings of the California Supreme Court when applying California law.").

The Alaska Supreme Court has also held, in State v. Native Village of Nunapitchuk, that Rule 82 is procedural, not substantive, though not in the choice of law context. Nunaptichuk dealt with whether Rule 82 is procedural for purposes of the Alaska Constitution, which "commits the enactment of all substantive law -- that is all law except rules of practice and procedure -- to the legislature" but authorizes the Supreme Court to "promulgate 'rules governing practice and procedure in civil and criminal cases in all courts.'"

In analyzing Nunapitchuk, we note that Alaska generally follows the Restatement (Second) of Conflict of Laws, which says that "[a] court usually applies its own local law rules prescribing how litigation shall be conducted even when it applies the local law rules of another state to resolve other issues in the case." Avis urges us to hold that Rule 82 is not a rule "prescribing how litigation shall be conducted" because the Alaska Supreme Court has said that Rule 82 has a partially compensatory purpose. We reject this argument because Nunapitchuk deemed Rule 82 to be "primarily concerned with . . . an effective and efficient system for the administration of justice" despite its compensatory purpose.

Based on the dicta in Ehredt and the holding and analysis in Nunapitchuk, we conclude that the Alaska Supreme Court would hold, for purposes of choice of law, that its attorney's fees rule is procedural. Rule 82 is thus substantive for Erie purposes, procedural for Alaska constitutional purposes of allocating authority as between the courts and the legislature, and procedural for choice of law purposes. We therefore hold that the law of the forum, Alaska, properly applies to diversity cases brought in or removed to the United States District Court for the District of Alaska. The district court did not err by applying Alaska Rule of Civil Procedure 82 to the attorney's fee award.